Investment Guide

The following text is designed to give you an understanding of the different types of investments strategies we use. Information Correct as of June 2020.

As investments are a large area of the financial world, not every section is applicable to everyone. Please contact us if you are interested to start investing.

 

See a list of some of the different types of investment vehicles.

  • ISAs (Individual Savings Account)

  • Investment Bonds

  • Open-Ended Investment Companies (OEICs) and Unit Trusts (UTs)

  • With Profits Funds

  • Venture Capital Trusts

  • Investment Trusts

  • Fixed Interest Securities (gilts and corporate bonds)

  • Passive Funds and Exchange Traded Funds

  • Property Investments

 

ISA (Individual Savings Account)

 

ISA’s are an effective way to invest spare cash tax-free as no tax is paid on the interest or capital gained from the money held in the ISA. There are four main types of ISA’s which can be used. These include Cash ISAs, Stocks & Shares ISA, Innovative Finance ISAs and Lifetime ISAs. Currently in the UK you can contribute up to £20,000 per tax year into any of the ISAs. For example, you can contribute £5,000 to a Cash ISA and £15,000 to a Stocks & Shares ISA per year and not have to pay any tax on the money generated by the performance of the ISA. ISAs are perfect for investors looking for a mid-long term investment as they can utilize a number of different investment strategies. See below for a quick outlook on the four different types of ISAs;

 

  • Cash ISA – as is the name, this ISA simply holds the savings in a bank or building society accounts

 

  • Stocks & Shares ISA – with this ISA, the aim is for the funds to be used to invest in shares on the stock market, unit trusts and investments funds, corporate bonds or government bonds (aka gilts). We have gone more in depth on each type of investment that would typically be found within ISA products.

 

  • Lifetime ISA – this ISA is designed for a combination of both Cash and Stocks & Shares ISAs Please note that for this ISA the allowance per year is £4,000.

 

  • Innovative Finance ISAs – this ISA involves peer-to-peer lending (loans for companies without using a bank) or ‘crowdfunding debentures’ (investing in a business by purchasing its debts)

 

Not every ISA is ideal for everyone depending on your individual attitude to risk and goals. Please call us for more information if you are interested in opening an ISA. Read more to understand the different investment strategies.

 

Investment Bonds

 

Investment bonds are single-premium life insurance contracts, where a lump sum is invested into different available funds. The fund will then use the money to invest in different types of investments which include shares, property, bonds and cash. Some bonds have a fixed term and others have no set term and run until you die or surrender the bond. This will depend on the provider, but they are intended for the med-long term investor and there may be penalties for redeeming early. At surrender, death or expiry, a lump sum is paid out and the amount will depend on the terms of the bond or the underlying performance of the fund which the money was invested in. Investment bonds do carry a risk factor and the amount of return can be lower than the original amount invested, however there are bonds that can guarantee capital and returns on the initial investment. The main advantage of investments bonds is that they allow 5% to be withdrawn with the ability to have the tax differed to a later time. This is especially beneficial to higher rate tax payers as they can defer the tax charge for when they retire or become a basic rate tax payer. There are many other benefits for investment bonds and if you think they may interest you, please contact us for further information.

Open-Ended Investment Companies (OEICs) and Unit Trusts (UTs)

 

OEICs and UTs are both professionally managed pooled funds. The managers of the funds will collect all the investors cash and invest into multiple assets and securities. OEICs and UTs are perfect for investors who do not have the time, knowledge or resources to invest in the stock market and securities themselves. The performance of both types of funds are purely based on the performance of the underlying assets and securities that have been invested in.

 

Although that both funds are similar in the way they are managed pooled funds they differ in how investors will invest in them. OEICs are listed on the London Stock Exchange and investors will invest in the fund by buying shares in the listed company. However, with UTs, you are buying units into the fund. The value of the shares/units are based on the assets that are held by that company and they can rise and fall depending on the performance of the fund. The way that your return is gained is by the value of the shares/units when you come to sell them, or in some cases the shares/units you hold can give you regular pay-outs in the form of dividends. There are many different types on funds, and some have higher risks than others due to the underlying assets they invest in. This has to be considered before you start to invest into either OEICs or UTs.

 

Most OEICs & UTs will allow you to sell the shares or units at any time or a specific time period. This will entirely depend on the fund and the assets that have been invested in. In addition, when you invest into a fund, there are different charges you need to be aware of. As the funds are managed, there will be management fees which will vary from fund to fund. There are also initial charges for when the shares or units are initially purchased and for when you sell you share/unit. The fees are usually based on percentages of the amount invested but these will be different from fund to fund. In addition, there may be other charges depending on the fund. As with any investment there may be additional taxes to pay on the proceeds from the investment and these will either be Dividend Taxation (from for OEICs) or capital gains tax (for UTs). Alternatively, you are able to invest in OEICs and UTs through a Stocks and Shares ISA which are tax free (within the ISA personal allowance limits) or through Bonds.

 

With Profits Funds

 

With Profit funds are designed for med to long term investors and they are offered by insurance companies. With Profits funds can be used in connection to when you set up an investment bond, endowment policy, whole of life policy or a pension and annuities. The money is pooled together with others who have invested to create a fund and is managed by a professional. The fund when then use the money to invest in different types of investments which include shares, property, bonds and cash.

 

As they are with profits funds, there is an element of risk and for the value to decrease past the initial investment. Although there are policies that can guarantee a minimum final value. As with the risks there is also potential for growth in the form of bonuses that can be added to the policy. There are two types of bonuses that can be added, these are called annual bonuses and final bonuses (aka terminal bonus). After all the costs of the running the insurance company’s business, the profit left over is then split between the investors. The amount of the bonus will differ from investor to investor due to the amount they initially invested. Once the bonus has been added to the policy, it cannot be removed even in bad performing years. Alternatively, instead of receiving an annual bonus, your policy may provide you with a final bonus which is added to the policy when it matures. Again, the size of these bonus is dependent on the performance of the fund.

 

In good performing years the insurance company may keep some of the profits to make up for any potential loss in bad performing years. The is called smoothing. The aim of smoothing is to limit large rises and falls in the value of the fund. If there are long periods of not receiving any bonus, you may receive low annual or final bonuses or non at all. It also important to remember that if you surrender the policy earlier then the insurance company can make a reduction to the value of the bonus you will receive to no affect other members of the fund. This could result in little or no bonus.

 

Venture Capital Trusts (VCTs)

 

VCTs are listed companies which allow investors to buy shares of a company that’s purpose is to invest in start-up/small companies who are looking for capital to grow without obtaining loans. This type of investment is considered to carry a high-risk factor to lose the investment but also carry a high return possibility. You can either subscribe to purchase shares of a new VCT or purchase existing shares off current investors in VCTs that already exist. Within the UK there are tax reliefs for investing in VCT, but these rules are very strict and the relief could be lost in the VCT company falls outside the criteria of being a VCT. As this is high risk investment, there is no guarantee for any gain or maintenance of the capital you initially invested as the shares value will depend on the value of the companies that have been invested in. Usually the fund manager will invest in a wide range of different types of small companies to lower the risk.

 

Investment trusts

 

Investment trusts are companies that sell their shares to raise money to invest in a wide range of securities which include shares, property, bonds and cash. These may sound similar to OEICs & UTs as they are all managed funds, but they differ in many ways. Firstly, the company can borrow money to invest in its portfolio of securities, this allows potential for higher returns but also greater loses. This is commonly referred to as gearing. By borrowing money to invest, this also allows the company to invest more without having to sell units to customers.

 

Depending on the set up of the company, you may be entitled to dividend payments from the company, however this will differ from fund to fund. The other way to gain a return is to sell your shares in the company, although it is important to note that the value of the shares could be less than what they were originally purchased for depending on the performance of the underlying investments. With OEICs and UTs you are able to sell them directly back to the company, whereas with investment trusts you must find another buyer to buy your shares off you. Capital gains tax will apply if a profit is made on the shares upon sale and bear in mind that. In addition, there are also fees to be paid to a stockbroker when you buy or sell the shares along with management fees paid to the company for managing the fund.

 

Fixed Interest Securities (gilts and corporate bonds)

 

Fixed interest securities are ways to raise money by borrowing from investors. These can be issued by companies and even governments. Securities that are issued by companies are referred to ‘Corporate Bonds’ and ones issued by the UK government are referred to as ‘Gilts’ or Gilt-Edged Securities’. This type of investment is relatively low risk (especially if they are issued by the government) and are commonly used in conjunction with other investment securities like shares, property & cash.

 

As you are lending money to a government or company, the most common way of receiving a return is by the way of regular payments, called a coupon, for the period you hold the security. The amount you will receive will depend on the nominal value of the security which is typically £100. For example, a security with a coupon of 5%, with a nominal value of £100 will pay £5 per year. In addition to the regular payments, when the security expires, you will receive the nominal value of the security. In our example this will be £100. It is also worthy to note that not all securities have a expire date.

 

In addition to the nominal value of the security, the security can be sold on the stock market as well. On the stock market this is where the value can change, usually depending on multiple factors, for example the performance on a company that has issued these securities could have a higher market value than nominal value, in turn a profit or loss can be made. This can also be better for potential investors who can purchase securities at a lower price than their nominal value. The price on the open market will reflect due to a large number of factors, like inflation, the period left on the security or if interest rates on savings and other investments in greater than the coupon of the security.

 

As with every investment there are elements of risk. Government bonds are considered to be the safest option as countries are more financially stable. UK Government Gilts are considered very safe, but some countries may not be able to maintain the payments. Corporate bonds are considered safer than shares on a company, but they still carry a degree or risks of the company running into difficulties. When investing in fixed interest securities, it is a good idea to invest a wide range and mixture of government and corporate bonds.

 

Exchange Traded Funds (ETFs)

 

ETFs are funds that aim to mirror the performance on market Indexes. For example, the FTSE 100. There are many different types of ETFs and all have their individual goals. They work by pooling together cash from investors to invest in industry sectors or market indices to form a ‘basket’ of securities. Investors can buy into these funds by buying shares of the ETF that are listed on the stock market. By investing in ETFs, they offer less of a risk than solely investing in shares as they have a wide range of underlying assets to lower the risk.

 

The way of making a return from ETF are through the share price of the ETFs on the stock market rising due to the performance of the underlying investments. The other way is through the ETF paying you dividends payments, although its worthy to note that not all ETFs will pay out dividends to their investors and they will re-invest any profits made back into the fund. As with every investment, there is an element of risk of the underlying investment made by the ETF could drop in value, thus reducing the value of your shares. On the other hand, if the value rises, your share price will rise. It is also important to note that ETFs do carry running costs as they are managed funds but as they are designed to mirror indices or market sectors, the cost a relatively low compared to an OEIC or UT. The exact fees will differ from fund to fund.

 

Property Investments

 

When talking about property investments, there are two main types. These are by way of purchasing a property yourself to be used as a form of income and capital appreciation or indirect property investment, where you do not actually purchase the property yourself.

 

If you are interest in purchasing a property yourself, you may want to read our mortgage guide as this goes in depth into discussing what makes up a mortgage.

 

When purchasing a property, you are looking for an income source, in the form of rental income (if the idea is to let the property) or capital appreciation (the value of the property rising). In the UK, property investment is considered a safe investment option as there is good demand for rental properties and values holding and rising. Although this is not guaranteed as economical situations could have an effect on both rental and property values. Within the UK you can either purchase property in your personal name or in a limited company (SPV). Each method has their own tax rules and it is important to discuss with your accountant along with an adviser as to what option is best suited for your future plans.

 

Alternatively, you can purchase property indirect through a number of different ways which include Property Funds, Real Estate Funds or listed Company. By investing in a property indirectly, lower the risk of the asset value falling as you have invested less and you will not have to directly manage the property unlike direct property investment, although you may not see returns/income levels as high if you purchased a property directly. Before you invest in any of the indirect property investment methods, it is important to note that the way of returns will differ and have different taxation rules to gains. For example, if you purchased shares in a listed company, dividend tax may be payable if a dividend is received.

 

Summary

 

The investment world is a wide industry and can provide people with many different methods to help grow their wealth. There are a lot of associated risks with any investment and they should be assessed in great detail before any investment is made. If you are interest in investing, please get in contact and we are happy to help.    

 

This page is for information purposes only and should not be used to make investment decisions.

THE VALUE OF INVESTMENTS AND THE INCOME FROM THEM MAY GO DOWN. YOU MAY NOT GET BACK THE ORIGINAL AMOUNT INVESTED.

For more information, you can read our Investment Advice Page

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Index House
13 Gateway Mews, Ring Way
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Contact

0208 211 9000

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