Axess Financial Services | Savings and Investments1

4. Medium - High risk investments
4.1. Equities
For those who want to see their money grow faster, or need a potentially higher income than the building society deposit account can offer, the stock market is the option. Whilst there are risks, the stock market can give a much better return than traditional savings accounts (chart 1). However, the investment is not guaranteed unlike a cash based fixed interest investments and the value can fluctuate any time.

Historically in the long term, a collective stock market investment has provided a better return than an investment in a building society. But it is important to remember that this may not always be the case in the future. However, those willing to take some risk with their money for greater returns this is one of the better options to consider.

4.2. A guide to investing in equities

Significance of fund performance

This is the most important component that will decide how much you will receive at the term for your investment. The challenge every investor face is how to identify the best provider or the best investment. There is no hard or fast rule how to achieve this as there are, as many theories as there are investment experts.

However, four factors are known to influence an investment.

a. Returns: this is primarily determined by the expertise of the fund managers of the product provider. There is no sure way to identify how well a company will return on an investment in the future; past performance is an important pointer that gives an indication on the fund managers expertise and what has been achieved in reality. Studying both short term and long term historical performance would identify how they have managed clients contributions in the past and also recent times. It would also identify those providers with strong long term investment philosophies that would allow the fund to perform even in the event of any changes in the management staff. This would furthermore separate companies who may only show strong performance at only selected points in time such as 1 year or 5 years, compared to those companies that show consistency in the long term.

Other factors such as general economic conditions which are beyond the control of the management also affect investment returns. However past performance is not a guarantee of future returns.

Alternative to actively managed funds is to opt for a passive investment such as a fixed interest investment or a tracker fund.( see risk and costs or charges )

b. Risk : also plays a significant role in investment returns. It can be said that higher the risk, higher the potential reward. However a balance need to be achieved between the risk and the reward. It is important to differentiate between a known risk and an unknown gamble or chance e.g. lottery. Investing in the stock market or equities is of greater risk than leaving money in a deposit account. Nevertheless, study after study has shown that investing in equities would provide e better return in the long term than investing in a fixed interest deposit accounts (chart 1).

Another way to minimise high risk is to utilize a collective investment so that the risk can be dissipated; such as unit trusts and OEICS, and also to invest in stock markets of different geographical regions.

c. Cost or charges : any investment where the provider is delivering an expertise, that service needs to be remunerated. The charges in a policy comes in three main forms the policy fee or administration fee, annual management charge and bid offer spread. Higher the charges less of the premium will actually go in to the investment.

Certain types of investments such as tracker funds have lower charges as there is no expertise provided to select the investments other than the administration service. A tracker fund is theoretically a direct reflection of all the shares in the stock market. However, a Tracker fund can not only be volatile as it will track every movement in the market it follows, but also more riskier as the portfolio will be weighted towards the largest capitalised companies in the market.

Due to the competitive nature of the ISA unit trust providers, the differences in the fees and charges tend to be small. Furthermore, charges should not be the only criteria when choosing the investment provider, as a well performing fund would overcome small differences in the charges. Other criteria such as past fund performance, flexibility to invest and the quality of service must also be taken in account.

d. Time : this is the forth dimension of investment. With long term investments, time reduces risk in equity holdings by allowing to ride out any short term volatility. Whilst time has an inverse effect on risk it can have the opposite effect on returns, as it allows compounding of returns to take place.

For example an investment returning 7% would approximately double every 10 years.
£5,000 invested in such an investment would return the following:

10 years ; £ 9,836
20 years : £19,348
30 years : £ 38,061
40 years : £ 74,872

Therefore when selecting an investment all these factors need to be taken into account. The risk that needs to be taken must be matched to the target term of the investment. Higher the risk element longer the investment term needs to be or the ability to maintain the investment in the event the markets become volatile.

As it can be seen in the chart 1, the stock market has consistently outperformed the return from bank and building society deposit accounts over the long term. It has also kept ahead of inflation. This is very important as it enable you to maintain the real value of your money.

4.3. Collective investments
a. Unit trusts

Investing in individual shares is one of the riskiest ways of investing in the stock market. Unit trusts were invented to avoid this risk for novice investors and allow them to also benefit from the potentially greater returns that can be obtained from equity investments. Unit trusts are often referred to as collective investments and provide a way to invest indirectly in company shares at a much lower level of risk. Typically a unit trust will hold anything from 40- 200 different stocks (even more with tracker funds) offering a high level of diversification to even the smaller investor. With this level of diversification the risk is greatly reduced. For example if you are to hold 10 individual shares, it will take only 2 shares to collapse for you to make 20% loss in your investment. Compare this with holding 200 shares.

Shares within the fund is held in a trust and you invest by buying units in the trust. The decision on which share to invest is made by a professional fund manager who gets his remuneration through the annual management charge. As with all equity related investments the price of a unit can fluctuated day-by-day with the value of the underlying investment.

As more investors come into the fund, their money is used to buy more units. Alternatively, units can be switched from investors selling out to those coming in. Units can be subject to two prices -you buy units at the offer price and sell at the bid price- usually between 3 to 6 per cent. This bid/offer spread covers the cost of creating units and other costs, such as marketing and advising.

There is a huge range to choose from. You can find funds investing in corporate bonds and other fixed-interest securities. Tracker funds have low charges because they simply follow the growth in a particular market index, such as the FTSE 100.

Funds are categorised depending or what they invest in and what their objective are, such as UK Equity Income, Global Growth and Far East Specialist Funds, Index trackers following the UK market, North American funds etc.

Tax Treatment
If you hold managed funds such as unit trusts and OEICs the income you earn from them must be declared each year on your annual tax return unless the income is paid into an ISA or PEP. The tax payable depends on the type of fund you are investing in. If you are investing in a UK equity fund, you will receive a dividend with a 10 per cent tax credit attached, which is only reclaimable through a PEP or ISA. Lower and basic rate taxpayers have no further tax liability but higher-rate taxpayers will have to pay a further 22.5 per cent. If you are investing in a fixed-interest or money market fund, you will receive income with 20 per cent tax deducted. Non-taxpayers and those only on the 10 per cent starting rate of tax can reclaim all or some of the tax deducted. Basic rate taxpayers will have no further tax to pay but higher-rate taxpayers will have to pay a further 20 per cent. Gains from selling your stake in a fund only need to be declared on your tax return if the sale together with that of other taxable assets in the same tax year exceeds a certain amount or if your taxable gains exceed your annual capital gains allowance.

b. OEICS
OEIC stands for open-ended investment company. As its full name suggests, an OEIC has a company structure, so that when you invest, you will hold shares. An OEIC is open-ended, which means that the fund can get larger or smaller, depending on the number of investors who wish to buy or sell shares. Many investment funds in the US and Europe have a similar legal structure.

OEICs are a relatively new form of investment vehicle. OEICs can have a flexible umbrella structure, offering a variety of subfunds, between which investors can switch to alter their investment objectives. Many fund managers are converting their unit trusts into OEICs, and the two types of find are classed together in performance tables.

One advantage of an open ended investment company, or OEIC, fund is that it has a single price, directly linked to the value of the fund's underlying investments. All shares in the fund are bought and sold at this single price. This contrasts with unit trusts, which have different buying and selling prices.

Tax treatment - see unit trusts

c. Investment Trusts

Another type of collective fund investing in a broad range of holdings, investment trusts are companies that make their profits by buying and selling shares in other companies. Because of their company structure, they have more freedom than unit trusts and OEICs, and can be more aggressive their investment style. They have more freedom to borrow money to invest, in order to enhance investor returns (called gearing or leverage) and so might suit more aggressive investors or those with a long time scale.

One downside is that, like all companies, they issue shares that are traded the stock exchange. So, whereas the price of units in a unit trust is directly linked to the value of its investments, the price of shares in an investment trust depends on how much investors are willing to pay for them. If demand is low and lots of investors are selling, the share price fall well below the value of the trust's investments (the trust's net asset value), in which case it is said to be trading at a discount. Many trusts are trying to reduce discounts by buying back shares to increase demand for those shares that remain on the market

Tax treatment - Dividends from investment trusts are treated much like any share. They are paid with a tax credit of 10 per cent, which can only be reclaimed through a PEP or ISA. Basic-rate taxpayers have no further liability, most higher-rate taxpayers will have to pay a further 22.5 per cent. All dividends must be declared on your annual tax return unless they are paid into a PEP or ISA. Capital gains are treated in the same way as unit trusts and OEICs.

4.4. Investing for tax-efficient returns
One of the best ways to invest in the stock market is through an ISA. An ISA is a tax efficient wrapper. Inside it you can protect your savings and investments from income tax and capital gains tax. There is no need to declare an ISA on your tax returns. Within an ISA you can invest in to not only investments products (e.g. stocks & shares), but also to cash and life insurance.

You need to be a UK tax payer to invest and there is an annual limit on how much can be invested. You can only have:
i. either one maxi ISA.
ii. or up to three mini ISAs (of different components each year).

Maximum amounts that can be invested each year are as follows.

Component	Mini ISA	Maxi ISA
Cash	up to £3000	up to £3000
Stocks & Shares	up to £3000	up to £7000
Life Insurance	up to £1000	up to £1000
*Total limit*	*£7000*	*£7000*

4.5. Children's Saving Plans
If you were to send your son, daughter or grandchild to university today, a typical 3 year course outside London would cost about £26,000. If your new born is to attend university in 2023, it would cost about 37,000 for three years if the costs increase by inflation of 2% alone. It is hoped a long term saving plan will give the best hope of building such a substantial asset.
There are now two primary forms of tax efficient investments for children.

a. Child Trust Funds
The idea of the Child Trust Fund is to provide a young person with a substantial financial asset when they reach a key life stage ie. university fees, travel or even deposit for a house.
The young person will have the option to decide how to spend the money.
How much will the government provide ?
Basic value is £250.
Parent who are registered for child tax credit and who are earning less than £13,480 a year will receive an extra £250 per child. Totalling £500
How long will it last?
The plan must be kept till the child reaches 18 years.

Can we top it up?
Yes you can save additionally up to £1200 per year in the same plan. so over 18 years you can invest further £21,600.
Anyone who wants to gift the child financially can contribute including parents, granparents and ralatives. The children themselves can top it with their own.
The funds will be further topped up by the Government when the child reaches seven but the value of this payment has yet to be decided.

Where can I invest the money?
There are three options, depending on the type of risk you want to take.
1. Cash based deposit accounts - similar to high interest bank saving accounts. Available from many high street banks. Similar to cash ISA accounts. The provider will pay an annual interest. Again like cash ISA many headline starter interests are promised by the banks but may not be maintained in the long term.
2. Equity based stakeholder account - equities or investments through stocks and shares are always thought to be the best option for a long term saving plan. Government expects this is where most of the vouchers will be invested. With an equity based account you will have the option to select from a limited number of various investment funds depending on the risk you want to take. With an equity based fund you will be decide depending on the risk you like to take. There are funds for the cautious minded investor to those who like to take a risk for potential higher returns.
Stakeholder account mean that the charges the company can take to run the account is limited.
3. Equity based non-stakeholder accounts - This is similar to the above, except the fund managers are allowed to charge a higher fee in return for providing a much wider variety of investment funds. You need to compare the charges and decide for the smaller difference in charges whether you prefer to have a greater investment choice. Again a good Independent Adviser will be able to look through the choices available.

If we don't open an account will the child loose the benefit?
No, if you have not opened an account for 1 year the Inland Revenue will open a stakeholder account for the child automatically. The parent is free to assume responsibility for that account later at any time, if they wish.
How much tax will the child pay on interest or growth?
The Child Trust Fund will be completely exempt from all taxes.

b. Friendly Society Children's Saving Plans.
Special government regulation allows up to £25 per month or £300 per annum to be saved through Friendly Societies under a favourable tax regime. Such plans therefore offer a tax-efficient way of saving, and provide a lump sum at the end of the savings term which can be used for any purpose.
Furthermore, friendly societies, being mutual organisations, have no shareholders, so that all profits can be used for the benefit of their members.
However, Friendly society saving plans are based on endowment policies. Therefore some of the premium is used to provide a life cover element to the plan which will reduced the saving elelment.

Tax treatment of children:
Remember that children are treated as unmarried singles by the tax man, and therefore have their own personal allowances.

Alternative saving options for children

Tax free with profit policies

Standard bank accounts

National Savings Children's bonds

Stakeholder pensions

Unit trusts & Oeics

Equity ISAs

5. High Income / Growth Bonds
These have a fixed term and are of two types:
High income or growth bonds: will provide a guaranteed growth linked to performance of a underlying stock market index or a stream of income again linked to the performance of a underlying stock market index. If the underlying index do not achieve a predetermined target you will get less than the original capital investment. In other words the income would have come from your own capital. The element of risk will therefore will depend on the stock market index the bond is linked to. These are considered higher risk than equities as the maturity date is predetermined,i.e. without the option to maintain the investment if the related market has fallen.

Minimum investment is normally £5,000, with a maximum of £50,000 with higher allocation rates given for higher sums.

Risk rating :high - depending on the underlying index link.
Suitability	i. Not suitable for non-tax payers. ii. Investors looking for a high income stream irrespective of security on the original investment. iii. Lower rate tax payers. iv. Higher rate tax payers who will fall in to the lower rate in the future (retirement). v. Offshore guaranteed bonds - pay % gross: for people planning to retire abroad, expats, non tax payers and charities seeking an income which is not taxed.
Withdrawal	Up to 5% per annum, tax deferred up to 20 years or predetemined fixed level.
Tax	Taxed within the fund at basic rate before distribution, hence no tax charge for basic rate tax payers; higher rate tax differed or on encashment.
	higher rate taxpayer (HRT): liability for extra tax, but this is calculated on the net rate. That works out better than equivalent building society accounts. However it is can be differed as the liability is at encashment. Can withdraw up to 5% of original investment cash year. HRTs need to declare on the tax return if more than 5% is withdrawn annually.
Charges	Most funds will have an initial charge or an establishment charge spread over five years of about 5% in total and an annual management charge of 1%.
Early withdrawal penalties	Heavy - almost always will not get the original investment.
Income paid	Depend on the bond : monthly, quarterly, half-yearly or yearly.
Returns	High - reflect the risk of the underlying index.

There are also "offshore" GIBs which pay interest gross. This is "rolled up" with the bond, so offshore GIBs may be suitable for people planning to retire abroad, expatriates, non taxpayers and charities which are seeking an income which is not taxed at source.

6. High Risk Investments :
Physical goods & novice businesses
6.1. Commodities
Any item that can be bought or sold. It is generally a physical item such as a base metal, oil, meat, livestock etc.

6.2. Single company & novice businesses
Can provide both income (in the form of dividends) and capital growth. Ordinary shares can fluctuate in value in line with the company's fortunes and dividends are not guaranteed. Investing in one company can be a highly risky pursuit. Diversifying your money between a number of different companies will spread your risk, but buying a lot of different equities can be expensive. An investment portfolio should be spread between at least ten different companies.

6.3. Debentures
A type of loan capital with a fixed annual rate of interest and redemption amount. Debenture stocks are usually secured on the company's assets and holders take precedence over ordinary and preference shareholders in the event of the company being wound up.

6.4. Venture Capital Trusts
Risk capital offered by individuals or institutions for investment in new or developing businesses where the capital is provided at least partially in exchange for shares or equity in the business rather than a loan.