From childhood onwards we are told to put away money to save for the future - perhaps this is to be sure that when we really need something we have the funds to acquire it, without taking on debt.  Whether you place your money in a piggy bank, or in a multinational investment house, the aims are broadly the same; to provide for our future needs, and to protect ourselves against unexpected causes of expenditure.

When planning your finances, it is important to distinguish the difference between savings and investment.  Savings are generally funds that you set aside, but can get to 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 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.

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 you should not normally consider investments unless you have some savings in place. Most investments are not guaranteed to return your money in full, although they do offer the prospect of higher returns than deposit accounts. Returns, risk and volatility are the factors that will determine a suitable place for your investments.

Savings and Investment products range from a simple current account, which allows a small amount of interest, but facilitates regular payments and withdrawals without detriment to your savings.  At the opposite end of the scale would be company shares, where you invest money in a company, with the prospect that the company will prosper and the shares will increase in value over time.  Whilst the benefits are potentially high, the risks are also much greater.

The value of investments can fall as well as rise and you may not get back the full value of your original investment. Contact your Financial Adviser before making any decisions.

Investment Assets
All investments carry some risk, and the Investment Risk page includes some information on how we might manage this risk. We can learn more about the particular risks and rewards of different investment funds by looking at their sector and assets in more detail.
All types of shares have different characteristics and these characteristics are complex. Hence there are fund managers within the industry to assess and measure these features and make investment decisions based on their knowledge and market experience.

Investment funds will have a particular aim, and often have a specialist sector which allows them to be compared to other funds of a similar make-up and ensures that the actual assets of the fund (the investments made by the fund manager on behalf of individual investors) remain in proportion with the selected aims and specification of the fund.

Sectors and Assets

The fund sector identifies broadly the areas in which the fund will invest.  This can be based on geographical terms, or in a particular industry.  For example, there are funds that only invest in UK companies, or Japanese companies, just as there are funds that invest purely in 'technology' companies.  In addition to this there are sectors that are a mixture of assets.  A typical 'balanced managed' fund will have some money invested in shares, some in property and some in fixed interest investments or bonds.

Although there are no guarantees as to performance or returns from any sector, our knowledge and experience can indicate how we might expect investments to perform.
   

There are many different areas in which to invest, and here we look at a few areas:

• Bank Accounts – current accounts may offer a very low rate of interest but they are the most flexible in terms of accessing your money.  Banks can also offer savings accounts, with higher interest rates, also notice accounts with very competitive interest rates, but you may have to give a certain amount of notice before making a withdrawal, or you must agree to invest the money for a set period of time.

• National Savings – 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 since they are backed by the government.

• Bonds & Gilts (Fixed Interest) - 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 investments based on business loans offered by private companies and are ‘rated’ based on the ability of the issuer to maintain interest payments and repay the loan.  A corporate bond fund will invest in a wide range of these loans. ‘Investment grade’ stock within the fund is rated AAA to BBB, whilst stock rated a BB or below are termed ‘sub-investment grade’ and is sometimes referred to as ‘High Yield’.  Some funds also invest in Government Bonds (known as Gilts in the UK).

The income yield that is available from fixed income investments varies according to the quality of stock.  Lower quality (sub-investment grade) stock usually offers 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.  As things stand, in order to achieve a reasonable yield without taking too great a risk an actively managed fund that invests in both gilts and corporate bonds (i.e. investment grade and high yield) represents the most suitable option.

• Property - The 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 offered historical attractive returns with relatively strong defensive characteristics (i.e. low volatility). 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.  Commercial property tends therefore to offer a more stable return than, for example, dividends paid on equities.

• Equities (shares) – Over the very long term equities have historically offered better returns for investors.  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.

All these types of investment are available through your adviser. You may be able to include your investment within a tax-efficient product such as an Investment Bond, ISA (Individual Savings Account), unit trusts or even a pension.

The value of investments can fall as well as rise and you may not get back the full value of your original investment. Past performance is not a guide to the future. Contact your Financial Adviser before making any decisions.

There is a vast array of products available with which to save, and choosing the right one can be difficult, so why not let us help you to decide which is most suitable for you?

The Financial Services Authority does not regulate National Savings Products    

Investment risk

When choosing your funds, you should carefully consider how much risk you are prepared to take.

‘Risk’ is a difficult concept to quantify and means different things to different people.  We generally assume that ‘risk’ means how much the value of your investment might fluctuate from day to day.

How much you might get back from your investment and the degree of risk you are prepared to take are linked and your fund selection should reflect this. 

The following key will help you to understand the different levels of risk you can take when investing you money.  Only you will know how much risk you are prepared to take but you should remember that even if you choose to take no investment risk at all, your money could buy you less in the long term because of the rise in the cost of living.

Risk Band	Your attitude to investment risk
High (9)	You are an adventurous investor willing to accept high risk for the prospect of high returns
High – (8)	As an adventurous investor, you will accept above-average but below high risk for the prospect of high returns
Medium + (6,7)	You prefer a balanced approach to investment and are willing to accept above-average risk in the hope of higher returns
Medium (5)	You prefer a balanced approach to investment and are willing to accept above average risk to achieve more attractive returns
Medium – (4)	You will accept below-average risk to achieve more attractive returns
Low + (2,3)	Although a cautious investor, you are prepared to accept low levels of risk for the prospect of slightly higher returns
Low (1)	You are a cautious investor and are willing to take a minimal amount of risk only

Diversification and Risk

All investments carry some element of risk. The value of the fund can fall as well as rise and you may not get back the full amount you originally invest. To enable funds to be able to manage the risks the manager will usually practice some level of 'diversification.' This works on the premise that holding 2 different shares is better than 2 of the same shares. This is because all shares react differently to investment conditions and changes.

The value of investments can fall as well as rise and you may not get back the full value of your original investment. Contact your Financial Adviser before making any decisions.