Collective Investments – Collective investments are also known as unit trusts, investment trusts and OEICs. With a collective investment, your money is pooled, along with that of other investors, to create a large capital sum. This is then used by fund managers to build up a large portfolio of investments. A collective investment allows you to indirectly hold a wide range of stocks and shares in a way which would not be practical for an individual investor, whilst minimising the effects on your capital to fluctuations of individual share values. You have access to expert full time investment management, reducing the risk and complexities of direct investment into equities.
Endowment Policies – Regular premiums are paid, and when the term of endowment expires a lump sum is paid out, which may be used to repay a mortgage. However to achieve this, the investment performance needs to be sufficient to build up the required capital and this performance cannot be guaranteed. Most endowments have protection that if the policyholder should die then a lump sum becomes payable. As these are fixed term savings vehicles they are now less popular due to the ability to invest flexibly via collectives.
Equities – Investing in equities means buying stocks and shares in companies listed on the stock exchange. This can bring greater rewards than investing in bank accounts and bonds as you have the possibility of gaining not only a dividend, but also a capital appreciation. If the price of the shares goes up after you buy them then you have made a capital gain. The value of the shares can go down as well as up, which means you risk losing your investment if the price of the shares falls.
Fixed Interest Investments – Fixed interest investments can provide a comparatively save haven during tough times. Investments can be made directly into corporate bonds or UK Government Stock (Gilts) however the majority of investors will invest via a fund to gain additional diversification. While considered to be lower risk than equities there is still a degree of risk since capital values can fall in value.
Individual Savings Account (ISA) – An ISA is a tax-efficient place for cash savings and investments in equities, bonds and collectives. An ISA is available to all UK residents over the age of 16 for cash ISAs and over the age of 18 for stocks and shares ISAs. There is usually a low level of minimum subscription and no minimum period of investment however you can only contribute up to your annual allowance and stocks & shares investments are recommended to be over at least 5 years. An ISA allows you to gather savings in a tax efficient way as all gains are tax free, making them particularly attractive to higher rate taxpayers. The Government introduced a new, simpler system known as the New ISA or NISA from 1 July 2014.
Investment Bonds – Designed to give capital growth and/or income over medium to long term with access to the fund by taking regular or one off withdrawals. In the past, if you cash in your investment within the first 5 years you were likely to be charged an early-surrender penalty, however this is less likely these days. Bonds can be either onshore or offshore to take advantage of tax concessions – this decision will depend on your personal tax situations. There are no maximum limits to invest, however the start-up figure can be higher than other investments. In some bonds the capital can be protected from stock market fall; however this will come at a cost. These bonds have management charges which vary greatly and should be assessed to see if they remain suitable for your objectives.
Investment Trust – Investment trusts provide a way of pooling your money with other investors. It is publicly listed companies whose shares are traded on the London Stock Exchange. The prices of shares in Investment Trusts will differ depending on investment demand and changes in the value of their underlying assets. The investment trust company may borrow to finance further investment, which is likely to lead to increased volatility in the Net Asset Value. This means that a small movement in the value of the company assets will result in a larger movement in the same direction of that Net Asset Value. A particular Investment Trust may invest in companies that are not listed on a stock exchange; these can be more volatile in their price fluctuations and more difficult to sell than listed shares.
Junior ISA – A long term, tax-free savings account for children who are under 18, UK resident, are not entitled to a Child Trust Fund account. Investments can be made into a Junior Cash ISA or a Junior Stocks and Shares ISA. A child can have one or both types but the total amount which can be paid into one/both is £4,080. If the child is under 16 the account must be opened by someone with parental responsibility, who then becomes the ‘registered contact’ and the only one who can change the account or provider. Anyone can put money into the account but only the child can take it out and only when they are 18.
National Savings Products – Investments offered by National Savings are the least risky investments. Although investment returns are not massive and some involve tying your money up for a long period of time, they are a stable option and in some cases can be paid tax free or paid without deduction of tax, which is beneficial if you are a non-taxpayer. These savings and Investment products are backed by H.M Treasury, which makes them the most secure cash products available in the UK.
Open Ended Investment Companies (OEICS) – OEICs are collective investment vehicles legally constituted as a limited company. OEICs are not trusts and do not therefore have a trustee, they instead have a depository which holds the securities. Most OEICs operate as umbrella funds which means that the OEIC is authorised and then can set up sub-funds without having individual authorisation for sub-funds. Each sub-fund has different investment aims, e.g. a sub-fund may specialise in the shares of a small company, or in a particular country. Most OEICs only have one unit price, where the initial charge is then added on as an extra.
Unit Trusts – Unit Trusts are a collective investment vehicles controlled by trustees with the aim of gaining capital appreciation and/or income. Unit trusts are made up of ‘units’, each of which will have a buying and a selling price. Units are created every time money is put into the fund, and liquidated when they withdraw money, meaning the fund can react to demand and continually grow through peak times. However, during periods of poorer performance, the fund may need to sell assets to enable investors to withdraw the money, so the fund size will be reduced.
With-Profits – In a With-Profits fund returns do not directly reflect the returns of the underlying assets of the fund. Instead the fund actuary allocates profits to investors with the aim of smoothing the good and bad years. These funds were popular in the past and were frequently recommended by the life offices tied sales forces but have now fallen out of favour due to their often opaque charging and market value reduction factors during market downturns. Some providers are now declaring minimal bonuses. The with-profits endowment policy is also a means of regular long-term saving and has the potential for a good return, but there is no guarantee of the final value of the policy. When choosing insurance products for investments, it is important to be aware of charges, fees or commission that may be added, and when profits and bonuses are added to the policies. These plans should be assessed to see if they remain suitable for your objectives.
We class a speculative investment as an investment without an income stream and therefore fully reliant on selling for a higher price that you bought at. In essence this aligns with “greater fool” theory in that you are dependent on someone buying the investment for more than you did.
Commodities – Raw materials that fall into two broad categories: Hard commodities – products of mining and other extractive processes, including gold, silver, crude oil and natural gas, and soft commodities – typically grown rather than mined, including coffee, cocoa, sugar, wheat, and livestock. As an asset class, commodities can appeal to investors as part of an overall strategy of spreading risk, because their prices tend not to move in tandem with equity or bond prices. Commodity investment is risky because the markets are dominated by interested traders, such as large metal businesses, who are more likely than private individuals to learn the latest information likely to move prices.
Works of Art and Collectables – Items that may appeal to an investor in this area include paintings, antique furniture, rare books, stamps, coins, limited edition plates, diamonds, gold and cars. Restoration, storage and insurance can all add to the cost and risk of this type of investments. It can be difficult to diversify and specialist knowledge on the collectable is needed to buy successfully.