Here at Anculo, we provide help and advice for anything you need financially.
When planning your finances, it is important to distinguish between savings and investments.
Savings are generally funds that you set aside that can be accessed relatively quickly. These savings are often for a specific need or purchase, like a holiday or a new car. The most common way of saving is into a bank account (‘deposit’ account) where the money can be accessed in an emergency, and for every £1 you put in, you will get £1 back and possibly some interest. In other words, the original capital is guaranteed.
Investments are designed to be held for a longer term, usually at least 5 years. You need to be comfortable with tying up this money for a period of time and should not consider investments unless you have some savings in place. Most investments are not guaranteed to return your money in full, although do offer the prospect of potentially higher returns than deposit accounts. Returns, risk and volatility are the factors that will determine a suitable place for your investments.
Investing and Risk
Whether you are looking at investing in a pension, an investment bond or ISA (Individual Savings Account), you might consider using investment funds. A fund is capital belonging to numerous investors, held in one place and used to collectively purchase securities, while each investor retains ownership and control of his own shares. Buying large numbers of shares or achieving a portfolio of investments may well be beyond most average investors so they effectively club together to increase their purchasing power.
Typically, these pools of money are run and managed by an investment specialist. The manager is paid to make the day-to-day decisions of where the pooled money is invested. The fund manager uses their expertise to make suitable investment decisions in order for the value of the pooled fund to hopefully grow over time.
Another advantage of pooled investment is being able to diversify.
The value of investments may fall as well as rise. You may get back less than you originally invested.
There are so many different asset types in which to invest, and here we look at just a few key areas:
- Bank Accounts – current accounts may offer a very low rate of interest (if any) but they are the most flexible in terms of accessing your money. Banks can also offer savings accounts, with higher interest rates, and also notice accounts with more competitive interest rates, but you may have to give a certain period of notice before making a withdrawal (60 or 90 days perhaps), or you must agree to invest the money for a set period of time.
- National Savings & Investments – these products are backed by the government and operate like bank accounts to a certain extent. There are some tax-free products available and they are generally considered low risk because of the government backing.
- Bonds & Gilts – Bond/Gilt Funds are generally considered to be lower risk than direct equity (share) investment although the value can still fall as well as rise. Bond markets can be split into two categories. Corporate bonds are interest-bearing investments issued by companies and are ‘rated’ according to the ability of the issuer to maintain interest payments and repay the funds lent to it in this way. A corporate bond fund will invest in a wide range of these loans. ‘Investment grade’ holdings within the fund are rated AAA to BBB, whilst stock rated at BB or below is termed ‘junk’ or ‘non-investment grade’ and is sometimes referred to as ‘High Yield’. Some funds also invest in the other category, Government Bonds (known as gilts in the UK).
More Investment Options
The income yield that is available from fixed income investments varies according to their quality. Lower quality (junk or non-investment grade) issues usually offer a higher yield to attract investors (as they may be otherwise put off by the increased risk/volatility) whilst gilts generally offer much lower returns; they are underwritten by the government and so the risk of default is much reduced.
- Property – The long-term historic performance of commercial property has very little correlation with the performance of corporate bond or equity based investments. For investors looking to diversify their portfolio, property funds have historically offered attractive returns. Income from commercial property funds is often derived from contractually binding contracts of rent paid by business tenants to occupy property. Consequently leases are often arranged over a long period and generally include an ‘upwards only clause’ which ensures that rents are not negotiated downwards during the lease period, even in times of falling markets.
- Equities (shares) – Over the long term equities have historically offered better returns for investors than deposits. Although this is not a guide to the future, it is felt that the increased risk of investing in company shares can potentially be rewarded by investment returns in excess of what is available from traditional bank or deposit accounts. However there are no guarantees.
- Investment ‘Funds’ – Specialist investment managers will often manage a fund (a pool of investments) that invests in one or more of the above categories, the aim being to diversify the risk across a spread of shares, or bonds, or both. There are hundreds of investment funds available, each with their own specific aims and objectives. Investment funds can also specialise in one particular sector, such as only investing in companies that are listed on the FTSE100 index, or only investing in construction and mining companies. There are also funds that invest geographically, perhaps only buying shares in Japanese or American companies. Each sector has its own unique characteristics, and your adviser will be able to explain more about this.
The information within this article is purely for information purposes only and does not constitute individual advice.