Beginners' guide to Investments

Types of investment

The first thing we all have to accept is that there's no such thing as a completely risk-free investment. Even the safest bank or building society account comes with the built-in risk of inflation, which erodes the buying power of your money. So to aim for a return which will outgrow inflation, you will often have to accept a higher risk. The choice is up to you. Your financial adviser can help you identify the level of risk you are comfortable with.

Remember, the value of an investment and any income from it can fall as well as rise depending on investment performance (and currency exchange rates where a fund invests overseas).

Investments can be split into four main groups, often known as 'asset types’.

These are:

• Cash
• Bonds
• Property
• Equities

 

Cash

Cash investments which are sometimes called deposit-based investments receive regular interest. They include bank or building society accounts, National Savings and other interest paying accounts. Cash investments generally give you easy access to your money, although some accounts may have a notice period before money can be withdrawn or interest is lost if you do. The interest rate payable may be fixed or variable. Also, other forms of investment do not include the security of capital which is characteristic of a deposit with a bank or building society account.

Cash investments have a low risk profile, however, the returns may be low too. They generally give lower returns over the medium to long term (for example, five to ten years) than other asset classes.You also have to be careful that the real value of your cash keeps up with inflation. This means the return you get, after tax, needs to be at least the same rate as inflation. So if inflation is 3% you need to earn at least 3.75% before tax as a basic rate taxpayer and 5% before tax as a higher rate taxpayer in order to keep up.

You can invest in cash through an investment fund, which may earn more interest. This is because fund managers have a wider spread of cash investments to choose from, paying potentially better rates.