investment Guide

Cash investments offer:

• security — the risks to your capital are minimal
• easy access to your money, although it may be tied in by a notice period or a fixed term
• a clear, interest rate based return

If your interest rate is lower than the rate of inflation, the buying power of your money will go down.

For example, if you have an interest rate of 1.5% and the annual rate of inflation is 4%, your savings will lose value by just under 2.5% each year — though the actual amount will still increase. On a £10,000 investment, that's a loss of almost £250 buying power a year.

You can invest in bonds directly or via unit–linked bond funds, when your money is pooled with that of thousands of other investors.

This allows fund managers to invest in bonds from a wider range of companies, which can reduce the risk to your money, but also reduce its potential growth. If one company performs particularly badly or well, the effect is offset by the rest of the fund, which reduces the impact.

• Bonds provide a regular income, potentially higher than that from a bank or building society account.
• A skilful fund manager can achieve a higher rate of growth than the average bond, or reduce the impact of a falling market by buying or selling at the right time.
• If you have invested in a corporate bond and the company is wound up, it must repay its bondholders before its shareholders. The same applies to interest payments.
• In general, bonds are lower risk than equities.

Bonds are affected by two main risk factors:

• credit risks
• interest rate risks

The risk to your money depends on the credit worthiness of the issuer. If a company is stable and financially secure, it's more likely to be able to repay your loan, meaning less risk and a lower interest rate.

Low-risk companies are known as investment grade. Bonds issued by less secure companies are known as non–investment grade, or junk bonds.

UK Government bonds are considered to be virtually risk–free because the Government could increase taxes in order to repay the loan. Bonds issued by other governments may carry more risks.

When the Bank of England changes interest rates, your bond will be more or less valuable depending on the direction of the changes made.

If interest rates become higher than the rate of your coupon payments, your money is earning less than it would if it was in a bank, where it is also more secure. This cuts the value of your bond, because nobody will buy it from you unless it's sold for less than its original value.

A direct property investment gives you:

• an asset that you can use while it increases in value
• the reassurance of a physical investment
• security — property is less risky than investing in equities
• income potential through rental payments

A property fund offers you:

• the chance to invest across a variety of properties
• the experience of a fund manager
• reduced risk – by investing in a large number of properties, the impact of a single property (for example an empty rental property) is less significant.

All property investments are subject to changes within the property market. A downturn could bring a shortage of buyers or mean the property is worth less than what you paid for it originally.

Exchange rates can also affect the value of overseas properties and any decline in the rental market can lead to a lack of suitable tenants to cover mortgage repayments.

Investing in property directly has potential problems, including:

• a costly initial outlay — including stamp duty, legal costs, rates, surveyor fees and any renovations
• high ongoing maintenance costs

Property fund investments also have unique risks:

• property can take years to sell delaying the return on your investment
• some funds are unregulated, which means investors have less protection

• Part—ownership of a company, without the need to get involved in the business.
• The value of your investment may increase if the company is successful.
• An annual income as long as the company remains in profit.
• Compared to cash, bonds or property this is a long-term, high-performance investment, although there's also a higher risk factor.

• The size of dividends is variable and payment is not guaranteed.
• Poor company performance, interest rates and a negative economic outlook can reduce share value.
• If a company goes out of business, shareholders are the last to be paid and may get nothing back.

There is the added risk with equity funds that the return depends on the fund manager making the right decisions.