A Guide: Investment

What are the differences between all the investments available?


This can be classified as money you might need to have available at short notice, or money you are setting aside for a specific event that you know will come up in the not too distant future, e.g. a holiday or a wedding. Normally savings are kept with a bank or building society.


Money that you can afford to set aside for a longer period of time, for example for over five years. However, you should bear in mind that investments are not always guaranteed to return your money in full.

Investment choices:

Life Insurance

Insurance helps to protect you against risks. Investment-type life insurance pays out a lump sum on maturity or alternatively a reduced amount if surrendered earlier. This is known as the surrender value. Whole-of-life insurance is different to investment-type life insurance in that it only pays out in the event of death and is not an investment vehicle – it is a protection vehicle. Investment-type policies, normally tend to cost a lot more than protection-only insurance.

There are different types of investment-type policies:

  • With-profits policies
  • Unit-linked policies
  • Income and growth bonds
  • Endowment policies
  • Maximum investment plans
  • Other life insurance which builds up a cash-in value

With-profits policies:

What is a with-profits policy? With-profits policies are long-term investments provided by insurance companies. They might be called endowments, investment bonds or with-profits bonds. With-profits policies usually include some life insurance cover. People often invest in these:

  • to produce a lump sum at a known date in the future (generally endowments); or
  • to provide an income from your investment with the possibility of growth in your investment.

With-profits products are based on funds that invest in a mix of shares, bonds, cash deposits and property. Policyholders' share the return from these investments and in a number of cases the profits and losses of the insurance company. The with-profits fund also meets the claims of policyholders (death benefits for example), the costs of running the business and maintaining the reserve fund. It may also have to meet the cost of paying dividends to shareholders of the insurance company.

Unit-linked policies:

What is a unit-linked policy or bond? Unit-linked policies are normally single premium, lump sum products often called bonds that usually have a minimum single investment of between £2000 and £5000. Your lump sum buys units in a fund and the value of those units increases over time with investment income (from dividends or interest) and through the increase in value of the fund's investments. As with other pooled investments there is, of course, no guarantee that the value of your investment will increase. A single premium unit-linked life assurance is really a policy designed to be held for five years or more. If you decide to cash in (surrender) before the end of the period that the policy is due to run for, there could be heavy penalties. Charges can be complex, and can include an initial charge through a bid/offer spread of 5% to 6% in the price of units, a unit allocation charge and an annual administration or management charge of around 1% to 1.5%.

Some unit-linked policies are also structured as endowments. These are similar to with-profit endowments in that monthly premiums are paid over the duration of the policy. The nature of the product is different, however in that the return is not dependent or linked to the profits of the insurance company, and any bonuses added. In the same way as a single-premium unit-linked bond, this product buys units in a fund and the value of your investment will grow and vary in line with the value of the fund's investments.

Income and growth bonds:

What is an income and growth bond? An income and growth bond is a type of single premium investment. Generally, the investment is linked to the performance of a stock market or some other factor such as a collection or "basket" of shares. They are usually held for a fixed number of years and provide income, growth or a combination of both. In some cases the original capital invested may be protected, however, most income and growth bonds are structured capital-at-risk products (SCARPs) also known as precipice bonds. The customer is exposed to a range of outcomes in relation to the return of their initial capital sum. In addition, the amount of initial capital repaid may be 'geared ' e.g. consumers may lose 2% of their capital for every 1% fall in the market past a certain level – this is the 'precipice' element. If the index, indices or basket of shares perform within certain thresholds, full repayment of the capital invested occurs (in addition to the income or growth on the capital). However, if the performance is outside these thresholds consumers could lose a substantial part, or even all, of the capital they invested.

Shopping around

When shopping around for life insurance policies it is important to compare products and prices from a range of providers. The following are general points to consider when 'shopping around';

  • Advice or execution-only. You can choose to receive advice and therefore an investment recommendation or may decide to invest in a particular product without receiving any advice – this is called execution-only. If you decided to buy without advice, then you are responsible for your choice. If the product that you choose is not suitable for you, you will have less grounds to be able to make a complaint against the investment services firm, at a later stage. If you receive advice, it is the investment services firm's responsibility to ensure that the product is suitable to your needs and circumstances.
  • Make sure that the policy you are considering meet your needs. Take into account the fact that you might want income, growth or even both from your investment. Consider the length of time the policy will run for. Remember that the policy might run over a longer period of time than the one you can afford. Also take into account that part of your premiums pay for life cover and you have to decide whether you want this.
  • Consider the amount you are going to invest over the life of the policy.
  • Consider how much you must pay during the life of the policy and how often, and whether you can afford the amounts being quoted. Consider whether it is possible to stop and start payments, and consider if you can vary the amounts you pay in premiums.
  • Consider whether you can transfer your policy to another insurance provider, and what charges, if any, there might be for the transfer. Also consider if there are any charges if you decide to stop the plan early.
  • Consider the potential returns you could get on your policy and whether this would meet your needs.
  • Take into account the fact that some investments are riskier than others. It makes good sense to consider the different levels of risk and opting for the one which best meets your needs.
  • With-profits. If you are buying a with-profits policy, you pay premiums on your policies either monthly or as a lump sum, otherwise known as a single premium. The insurance company may use part of your premium to pay for any life insurance cover that they include in the policy, commission to your financial adviser and the company's expenses. The company puts the rest of your premiums, and those of the with-profits policyholders, together in a pooled fund. The insurance company pays most of the tax due on the investment returns (but this can vary depending on the product) and tries to make the fund larger by investing the money in assets which could include; buying shares in companies, buying gilts (loans to the government that will earn interest for the fund) and corporate bonds (loans to companies that will earn interest for the fund), and buying or renting out properties.
  • Bonuses. If you receive a bonus on the investment you have opted for, this will normally be a percentage of the returns earned on the investments. Insurance companies normally add annual bonuses called regular, annual or reversionary bonuses. Usually, this bonus increases the value of the sum assured under the policy. As long as you do not cash the policy in early (where policies have fixed terms), the company cannot take these bonuses away once they have added them to your policy.
    For with-profit endowment policies the insurance company may add a final or terminal bonus which is an extra bonus at the end of the policy's term. An insurance company might tell you about the terminal bonus it hopes to pay you in the future but it is not obliged to pay you that amount. This amount can readily change if the value of the investments has fallen, for example, in which case you will get a lower terminal bonus.
  • Smoothing. The amount of profits earned each year will depend on how well the fund's investments have performed. Normally companies hold back some of the profits earned in good years in order to compensate for years when the fund does not perform well. This is called smoothing and is only associated with with-profits products. However, if difficult economic conditions continue over several years, the insurance company will pass the losses on to policyholders. It can do this by paying lower annual bonuses or paying a smaller terminal bonus, or a combination of both.
  • Market value adjustments (MVAs). Market value adjustments (MVAs) generally take the form of a charge levied on investors who withdraw some, or all, of their money from a with-profits policy before the policy has reached the end of its term i.e. cash-in early. MVAs are applied as a percentage of the amount that the investor withdraws. So, for example, if a firm decides to make a 10% MVA, then when an investor cashes in an investment worth £10,000, the investor will receive £9,000. Firms use MVAs to try to ensure that policyholders who cash in some or all of their with-profit investment before the end of the policy term do not disadvantage the remaining policyholders.
  • Key features document. This document provides you with key information about the name and type of your policy, the effect of charges, how your funds will be invested and who the provider,  i.e. the insurance company, is.
  • Guarantees. There are few products where the final return is guaranteed, i.e. where the amount you will receive at maturity can be quantified when you first invest. In some cases, you may actually receive less than you have invested. In these cases, your capital is not protected and is therefore not guaranteed. In other cases, your initial capital may be protected and therefore guaranteed, but the return you could achieve, i.e. the "profit" you could earn, is not guaranteed.

Very often life assurance policies are used for the purposes of financing property purchases.  There are different ways of financing a property purchase, with the two main methods being via the use of an endowment mortgage or a repayment mortgage.  Additional guidance in relation to these is provided on a separate page -  Property Purchases.


What are shares? What is a stock exchange?

A share is simply a part-ownership of a company. If, for example, a company has issued a million shares, and you own 10,000 shares in it, then you own 1% of the company. As a part-owner of a company, you are investing in the management of the company. You should invest in companies you feel confident are well run.

At its most basic, the stock exchange is a market which brings together people who want to buy shares in a company, and those who want to sell their shares. The laws of supply and demand determine the prices buyers and sellers settle on. The companies whose shares can be bought and sold on the stock exchange are referred to as listed companies.

Why invest in shares?

Capital Growth: Over the long term, shares can produce significant capital gains through increases in share prices.

Some companies can also issue bonus shares to their shareholders by way of a "bonus issue" as another way of passing on company profits or increases in their net worth. A bonus issue occurs when money from a company's reserves is converted into issued capital, which is then distributed to shareholders in place of a cash dividend. A bonus issue does not change the value of your investment.

Many listed companies also make what are called "rights issue" where they provide opportunities to their existing shareholders to buy more shares in the company at a discounted rate and without the need to buy through investment services firms, thereby saving on fees. Companies do this as a way of raising more capital for expansion, and it provides you with an opportunity to increase your holding in the company at a discounted price if you are confident of its potential.

Dividends: Companies may pay a portion of their profits to their shareholders in the form of dividends. The amount of dividends to be paid to existing shareholders is usually determined and approved at the company's Annual General Meeting. The amount of profit which is not distributed is ploughed back into the company in the form of reserves. Such accumulation of reserves is then used by the company for future projects.

Buying and Selling: Compared to other investments (such as property), shares can be bought or sold relatively quickly through an investment services firm. You can, if you so wish, sell part of your holdings in any shares. Diversifying: As part of your investment strategy, you may have part of your money invested in shares. You may buy shares directly on the stock exchange, units in a collective investment scheme that invests in shares or via an insurance policy that invests in shares.

Are shares a risky investment?

As with all other investments, prices of shares can go up as well as down. Sometimes, share prices can change substantially as a result of reaction to some news which may affect the listed company. Whenever there is news about a listed company which shows, for example, improvement in its profits, investors tend to react positively by purchasing more shares into the company. As the demand for the shares increases, so will the price because people will be less willing to sell their holdings in the shares. This is referred to as the law of supply and demand - when demand increases, prices increase. On the other hand, prices will start to fall sharply when investors, react negatively to news about the company, and will dispose of their holdings as quickly as possible to minimise any dramatic downfall in the value of their shares.

There are instances where share prices can fall dramatically. Do not get into a panic - think carefully before selling your shares quickly at a loss. In fact, do not buy or sell on the basis of a change in price only. Your decision to buy or sell should also be based on an analysis of the company's annual report, changes in management, news about the company etc.

A company is not obliged to pay periodic dividends, even if it has made profits. Hence, you may find that although in one year a company has paid out dividends to its shareholders, the following year that same company may choose, for a number of reasons, not to share part of its profits with its shareholders. Therefore, shares are not suitable if you want a periodic (such as annual) payment of interest. Shares are perhaps more suitable for those seeking capital growth and are prepared to take some risk.

Are all your eggs in one basket? Ask yourself: is this your only investment or your biggest investment (except for your home)? If all your money is going into purchasing shares only or in units of collective investment schemes which invest in shares, you will be taking a bigger risk than someone who has invested in a variety of other safer products.

What is the best way to obtain information about a company?

You should rely on the professional advice of your investment services firm and your own research when deciding which companies to invest in. The following points provide you with some suggestions regarding sources of information available to the investing public.

  • Read and listen to the media: This includes newspapers, radio, television and internet sites. If the company is listed on a stock exchange you can look at its share price to obtain an indication of the current value of the share for the company.
  • Read the company's annual report: If a company is listed on a stock exchange look at its most recent annual reports to see what it has been doing for the past few years and whether it has delivered on its promises. Usually the company will give you these for free or you can get them from via investment services firm. The reports will include financial statements, details of the company's operations over the past year, what the company does, and details of directors and major shareholders of the company. The company's balance sheet shows what the company owns and what it owes, and its profit and loss statement shows what the company has earned during the year and how these earnings have been distributed.
  • Look at company announcements: From time to time, listed companies make announcements about major issues related to their operations. For example, an announcement by a listed company could be made when half-year and full-year accounts are made public.
  • Read reports by stockbrokers and investment services firms: Many investment services firms carry out analysis of various listed companies and you can often get their reports for free. Some investment services firms also send newsletters with summaries of these to their clients.
  • Visit the company's website: Many listed companies nowadays have their own website that contain large amounts of information about the company's activities and its share price. You can also contact the company secretary or someone from the public relations office to send you information about the company.

What is an "Initial Public Offering"?

An Initial Public Offering (sometimes referred to as IPO or "flotation") occurs when a company offers its shares to the public for the first time to raise capital. For this purpose, the company issues a prospectus, which is a document that will help you decide whether the company is a suitable investment for you. A prospectus is required by law to contain all the information you and your investment services firm would need so as to make an informed investment decision about the company. It must clearly disclose any risks associated with the investment.

You should not only be interested in what the prospectus says but also think about the matters that it is silent on. Understand the assumptions in the forecasts - many companies make profit forecasts in their prospectuses which are not met. You need to read the prospectus critically and decide whether the assumptions made in the prospectus are reasonable. The company should disclose what assumptions have been made in preparing those forecasts.

What is the best way to keep track of my shares?

One of the best ways to protect your share investments is to be an involved shareholder in the company. You should be interested in what happens in the company and exercise your powers as a voting shareholder. Keep an eye on your investment because circumstances may change and the market value of your investments will certainly change.

Material sent to you by the company: You will usually receive regular information from the company. Listed companies are obliged to publish an annual report which is distributed free to all shareholders. Read whatever material is sent to you by the company. If the information is late, check with the company.

Receipts and paperwork: Always request receipts from your investment services firm and keep all the paperwork about your investments in a safe place.


What are bonds?

A bond is a debt security. When you purchase a bond, you are lending money to a government or a private corporation or another entity known as the issuer. In return for the loan, the issuer promises to pay you a specified rate of interest during the life of the bond and to repay the face value of the bond, sometimes referred to as the principal, when it "matures", or comes due.

There are various types of bonds you can choose from: local and foreign government securities e.g. government debentures or national savings bonds, corporate bonds, developing country bonds and eurobonds. There are some types of life-assurance based policies that are also called bonds. These types of bonds are not however the same.

Why invest in bonds?

Most investment services firms recommend that investors maintain a diversified investment portfolio consisting of a range of securities in varying percentages, depending upon individual circumstances and objectives. Because bonds typically have a predictable stream of payments and repayment of principal, many people invest in them to preserve and to increase their capital or to receive dependable interest income.

What aspects do I have to look for if I choose to invest in bonds?

There are a number of key variables to look for when investing in bonds: the bond's maturity, redemption features, credit quality, interest rate, price, yield to maturity and tax status. Together, these factors help determine the value of your bond investment and the degree to which it matches your investment objectives.

  • Maturity: A bond's maturity refers to the specific future date on which the investor's principal will be repaid. Bond maturities generally range from one day up to 30 years. Maturity ranges are often categorised as follows:
  1. Short-term bonds - maturities of up to four years;
  2. Medium-term bonds - maturities of five to 12 years;
  3. Long-term bonds - maturities of 12 or more years. Some bonds do not, however, have a maturity date.
  • Redemption Features: While the maturity period is a good guide as to how long the bond will be outstanding, certain bonds have structures that can substantially change the expected life of the investment. For example, some bonds have provisions that allow or require the issuer to repay the investors' funds at a specified date before maturity. Bonds are commonly "called" when prevailing interest rates have dropped significantly since the time the bonds were issued. Before you buy a bond, always ask if there is a call provision and, if there is, be sure to obtain details of the yield to call in addition to the yield to maturity. Bonds with a redemption provision usually have a higher return to compensate for the risk that the bonds might be called before maturity.
    Your choice of maturity will depend on when you want or need the principal repaid and the kind of investment return you are seeking within your risk profile. Some investors might choose short-term bonds for their comparative stability and safety, although their investment returns will typically be lower than would be the case with long-term securities. Alternatively, investors seeking greater overall returns might be more interested in long-term securities despite the fact that their value is more vulnerable to interest rate fluctuations and other market risks. Longer term bonds will fluctuate more than short term bonds - even though they might have higher yields to maturity.
  • Credit Quality: Bond choices range from the highest credit quality, which are backed by the full faith and credit of the issuing entity (such as the government), to bonds that are below investment grade and considered speculative. When a bond is issued, the issuer is responsible for providing details as to its financial soundness and creditworthiness. This information is contained in the prospectus. If your investment services firm is not able to provide you with a copy of this document, you should request a summary of the main features attached to the bond which you intend to purchase. Such features would normally include: information about the issuer, name of the bond (including date of maturity), current price, accrued interest (if any), frequency of interest payments, redemption information and ratings. Make sure that all information given to you verbally is put down in writing for future reference.
  • Country or Sovereign Risk: Some investors are tempted by the prospect of earning high returns by investing in emerging country bonds. However, although the annual or semi-annual interest payment can be quite high, most investors tend to discount the underlying country or sovereign risk. This is risk inherent in holding shares, bonds or other securities whose fortunes are closely linked with a particular country. If the country goes into an economic downturn, or its debt is downgraded, or the international investor sentiment just turns against it, your investments may well lose value. Generally speaking, country or sovereign risk is more of a problem for investors in emerging markets than in developed economies. Of course the very volatility of emerging markets also presents opportunities - although retail investors should exercise extra caution when investing in such securities.
  • Interest Rate: Bonds pay interest that can be fixed, floating or payable at maturity. This is known as a coupon. Most bonds carry an interest rate that stays fixed until maturity and is a percentage of the principal or face value amount. Typically, investors receive interest payments semi-annually. For example, a EUR1,000 bond with an 8% interest rate will pay investors EUR80 a year, in payments of EUR40 every six months. When the bond matures, investors receive the full principal or face value of the bond, that is EUR1,000.
    But some sellers and buyers of bonds prefer having an interest rate that is adjustable, and more closely tracks prevailing market rates. The interest rate on a floating-rate bond is reset periodically in line with changes in a base interest-rate index.
    Some bonds have no periodic interest payments. Instead, the investor receives one payment - at maturity - that is equal to the face value of the bond plus the total accrued interest, compounded semi-annually at the original interest rate. Known as "zero-coupon bonds", they are sold at a substantial discount from their face amount. For example, a bond with a face amount of EUR20,000 maturing in 20 years might be purchased for about EUR5,050. At the end of the 20 years, the investor will receive EUR20,000. The difference between EUR20,000 and EUR5,050 represents the interest, based on an interest rate of 7%, which compounds automatically until the bond matures.
  • Price: The price you pay for a bond is based on a whole host of factors, including interest rates, supply and demand, credit quality, maturity and tax status. Newly issued bonds normally sell at or close to their face value. Bonds traded in the secondary market, however, fluctuate in price in response to changing interest rates. When the price of a bond increases above its face value, it is said to be selling at a premium. When a bond sells below face value, it is said to be selling at a discount.
  • Yield: Yield is the return you actually earn on the bond based on the price you paid and the interest payment you receive. The yield to maturity tells you the total return you will receive by holding the bond until it matures or called. It also enables you to compare bonds with different maturities and interest payments. Yield to maturity equals all the interest you receive from the time you purchase the bond until maturity (including interest on interest at the original purchasing yield), plus any gain (if you purchased the bond below its par, or face value) or loss (if you purchased it above its par value).
    You should ask your investment services firm for the yield to maturity on any bond you are considering purchasing. Your investment services firm will also help you understand better how the yield to maturity is calculated.



But how can I know whether the company or government entity whose bond I'm buying will be able to make its regularly scheduled interest payments in 5, 10, 20 or 30 years from the day I invest?

You may have heard your investment services firm mention the term "triple A" or simply an "A". These are called "ratings". Each international bond is usually given a rating by a rating agency. These agencies - such as Moody's or Standard and Poor's - give these ratings when bonds are issued and monitor developments during the bond's lifetime. Such agencies maintain research staff that monitor the ability and willingness of the various companies, governments and other issuers to make their interest and principal payments when due. Your investment services firm can supply you with current research on the issuer and on the characteristics of the specific bond you are considering. Each of the agencies assigns its ratings based on an in-depth analysis of the issuer's financial condition and management, economic and debt characteristics, and the specific revenue sources securing the bond. The highest ratings are AAA (Standard & Poor's) and Aaa (Moody's). Bonds rated in the BBB or Baa category or higher are considered investment-grade; securities with ratings in the BB or Ba category and below are considered below investment-grade.

It is extremely important to understand that, for any single bond, the high interest rate that generally accompanies a lower rating is a signal or warning of higher risk.

Market Fluctuations - The link between Price and Yield: From the time a bond is originally issued until the day it matures, its price in the marketplace will fluctuate according to changes in market conditions or credit quality. The constant fluctuation in price is true of individual bonds - and true of the entire bond market - with every change in the level of interest rates typically having an immediate effect on the prices of bonds.

When prevailing interest rates rise, prices of outstanding bonds fall to bring the yield of older bonds into line with higher-interest new issues. When prevailing interest rates fall, prices of outstanding bonds rise, until the yield of older bonds is low enough to match the lower interest rate on new issues. Because of these fluctuations, you should be aware that the value of a bond will likely be higher or lower than both its original face value and the purchase price if you sell it before it matures.

Assessing Risk: Virtually all investments have some degree of risk. When investing in bonds, it is important to remember that an investment's return is linked to its risk. The higher the return, the higher the risk. Conversely, relatively safe investments offer relatively lower returns.

Collective Investment Schemes

What is a "collective investment scheme"?

These are financial products where money from a number of different investors are pooled and then invested by a fund manager according to specific criteria. The scheme or fund, as they are more generally known, is divided into segments called 'units', which are to some degree similar to shares. Investors take a stake in the fund by buying these units - they will therefore become unit holders. The price of a unit is based on the value of the underlying assets the fund has invested in. Collective investment schemes may have different fee structures - make sure you understand how you will be charged before you invest as charges may have a major impact on the performance of your investment.

How do collective investment schemes vary from one to another?

Collective investment schemes can invest in shares, bonds, bank deposits and other financial products. Usually, fund managers select the investments they think will do best and switch from one to another as market conditions change. However, fund managers are obliged to follow prescribed investment criteria which are set out in the fund's prospectus.

There are a wide variety of types of funds:

  • Money market - invest in deposits and short-term securities. These are low risk but cannot be expected to give high returns over the long-run.
  • Bond Funds - invest in corporate bonds, government bonds and/or similar securities. They are medium to low risk and usually aimed at providing income rather than growth. Because there are many different types of bonds, bond funds can vary dramatically in their risks and rewards.
  • Equity (or share) Funds - generally involve more risk than money market or bond funds, but can also offer the highest returns. A fund's value (net asset value) can rise and fall quickly over the short term. Not all equity or share funds are the same. For example, growth funds focus on shares that may not pay a regular dividend but have the potential for large capital gains.
  • Balanced Funds - invest in a combination of shares and bonds ensuring diversification. They are suitable if you want a medium-risk investment. They can be aimed at providing income, growth or both.
  • Tracker - unlike the other funds listed here, there is no fund manager actively choosing and switching securities. Instead, the investments are chosen to move in line with a selected stock index - such as the FTSE 100, an index of the share prices of the 100 largest companies (by market capitalisation) in the UK which is updated throughout the trading day. As there is no active management, charges are usually lower.
  • Specialist - invest in particular sectors, such as Japan, or particular types of shares, such as small companies. Suitable only if you are comfortable with relatively higher risk.
  • Sector - invests in a specific sector such as Retail or Telecommunication Services. Can also involve higher risk.

How do I earn money from an investment in a collective investment scheme?

You can earn money from your investment in a collective investment scheme in three ways;

  1. A fund may receive income in the form of dividends and interest on the securities it owns. A fund will pay its unit holders nearly all the income it has earned in the form of dividends. Usually, these funds are called "Distributor Funds".
  2. The price of the securities a fund owns may increase. When a fund sells a security that has increased in price, the fund has a capital gain. At the end of the year, most funds may choose to distribute these capital gains (minus capital losses) to investors.
  3. If a fund does not sell but holds on to securities that have increased in price, the fund's value (net asset value) increases. The higher net asset value reflects the higher value of your investment. If you sell your units, you make a profit (this also is a capital gain).

Usually funds will give you a choice: it can send you payments for distributions and dividends ("Distributor" funds), or you can have them reinvested in the fund to buy more units (called "Accumulator" funds).

What should I look out for if I decide to invest in collective investment schemes?

Read the fund's prospectus and shareholder reports, and consider the following:

  • Check total return: You will find the fund's total return in the financial highlights, usually at the front of the prospectus or the annual financial statements published by the fund. Total return measures increases and decreases in the value of your investment over time, after subtracting costs (you will usually find it written as "Net Return"). When expressed as a percentage, net return for an indicated period is calculated by dividing the change in a fund's net asset value, assuming reinvestment of all income and capital gains distributions, by the initial price.
  • See how the net return has varied over the years: The financial highlights show yearly total returns for the most recent five or 10 year period. Looking at year-to-year changes in total return is a good way to see how stable the fund's returns have been.
  • Scrutinise the fund's fees and expenses: Funds charge investors fees and expenses - which can lower your returns. For example, if on an investment of €5,000, you have to pay a front-end fee of 2% (€100), the actual amount invested would be €4,900. This means that if you wish to realise an adequate return, the fund would need to achieve a return which would at least get back the fee that you paid initially. Find the section in the fund's prospectus where the costs are explained. Usually, fees fall under two main categories: sales load and transaction fees (paid when you buy, sell, or exchange your units), and ongoing expenses (paid while you remain invested in the fund).
  • Sales Load and Transaction Fees: No-load funds do not charge sales loads.
  • Front-end load: A front-end load is a sales charge you pay when you buy units. This type of load reduces the amount of your investment in the fund.
  • Back-end load: A back-end load is a sales charge you pay when you sell your shares. It usually starts out at a specified amount for the first year and gets smaller each year after that until it reaches zero (say, in year four of your investment).
  • Ongoing expenses: The section about fees tells you also the kind of ongoing expenses you will pay while you remain investing in the fund. The relevant section shows expenses as a percentage of the fund's assets, generally for the most recent fiscal year. Here, the section will tell you the management fee (which pays for managing the fund's portfolio), along with any other fees and expenses.
  • Performance fees: Some funds also charge a performance fee. This annual fee - which is usually paid to the adviser of the fund - is applied by adding a percentage to the difference in the performance of the fund during the year compared to the performance with the previous year. The calculation of the fee may not be very straight forward and you will need the assistance of your investment services firm if you want to know more about how this fee is calculated. In essence, this fee gives an incentive to the adviser of the fund to select the best securities on the market in which to invest. A better performance will mean that the adviser gets a larger share of the profits which the fund has generated.
  • Switching: Many funds allow you to switch your units for units of another sub-fund within the same collective investment scheme. The fee section will tell you if there are any switching fees.

What other sources of information should I consult?

Read the sections of the prospectus that discuss the risks, investment objectives, and investment policies of any fund that you are considering. Funds of the same type can have significantly different risks, objectives and policies.

You can get a clearer picture of a fund's investment objectives and policies by reading its annual reports. If you are not receiving these reports, you should contact your investment services firm or the fund manager of the collective investment scheme for a copy.

You can also research funds at most reliable internet sites and investor journals or newspapers.

One final hint - generally the success of your investments over time will depend largely on how much money you have invested in each of the major asset classes - shares, bonds and cash - rather than on the particular securities you hold. When choosing a collective investment scheme, you should consider how your interest in that fund affects the overall diversification of your investment portfolio. Maintaining a diversified and balanced portfolio is key to maintaining an acceptable level of risk.

Investment strategies

Risks and potential returns vary greatly from investment to investment. Shares offer you growth, but they can be volatile. Bonds provide you with income although they come in varying risks. Collective investment schemes can provide you with growth, income or both but are also subject to volatility in the value of the underlying investments and lower potential earnings.

Strategic investing involves allocating your funds in a variety of ways - diversifying among different plans. Once you have evaluated your investment goals, assessed how much money you can reasonably invest, determined your risk comfort level, and learned about your investment choices, you are ready to build a diverse portfolio of investments.

A portfolio is the collection of all your investments: all the shares, bonds, cash deposits, property, and so forth. Careful investing involves building a diverse portfolio, one in which your investments are spread over a range of investment choices.

Because there is no certainty as to how your money will grow over time, diversifying investments can help protect you when some investments do not perform as well as others. Investing in collective investment schemes allows you to diversify within a class of investments such as shares or bonds without actively designating where the money should go among these individual investments.

Once you make a lump sum investment in a collective investment scheme, a fund manager takes care of spreading that sum among a range of investment options. In exchange for their services, collective investment schemes generally charge you a fee, based on the amount of your yearly assets in the fund.

Individual investors, especially those with long-term investing plans who are willing to absorb market shocks, may feel confident investing a portion of their money in shares. Within the world of shares, there are many ways to diversify as well.

For example, you can invest in blue chip shares - large, established companies with strong records of profit growth that also often pay dividends whilst growth shares - often companies that are just starting out - provide another option. Growth companies, whose earnings are increasing at a rate faster than the industry average, are often smaller companies today, but may not be for long. You can also diversify your investments in shares by purchasing shares in a variety of industries. Owning securities in a variety of industries offers some protection - when one industry is declining, another may be growing.

After examining the various ways to invest money, you have to decide what percent of your income you want to invest where. Like the other components of an investment plan, your need for a diverse portfolio may change over time.

As you determine your investment strategy, here are some points to keep in mind:

  1. Growth is the rate at which your money increases in value during the time it is invested. If you think you will need your money back sooner rather than later, look for an investment that provides a fairly safe, steady growth rate and which is relatively liquid. High growth investments might be tempting but are usually subject to substantial fluctuations. Long-term investments that are influenced by factors such as the inflation rate may lose money in the short term, but they can still grow over an extended time frame. What will matter is not a slow growth rate (or even a loss) during a particular period, but a higher growth rate over time.
  2. Yield is the interest or dividends paid on your investment. Like growth, it can vary in importance depending on your needs. If you are retired and your investment is funding your retirement, your investments should generate enough yield to let you live on the interest. Savings or fixed deposit accounts tend to yield small percentages; bonds, on the other hand, can yield higher percentages, but their yield rate is affected by inflation. Shares, and collective investment schemes which invest in shares, can yield the highest percentages but also have the greatest chance of loss.
  3. Closely related to yield, the third factor to consider is income. Does your investment or the yield from your investment, make up a significant portion of your income? If so, you may want to be more conservative with your investment choices to ensure that the amount of yield it produces remains consistent and reliable. You should give careful consideration to where and how often you want to reinvest your money, as it could affect your financial security. Savings and fixed deposit accounts, for example, are safe and very liquid. If you are retired, your investments may be your primary source of income and it is generally more important that you select investments that produce income rather than growth.
  4. The fourth factor to consider is risk. Simply put, risk is the possibility of losing some or all of your investment. Each investor has a different risk tolerance. If you are a conservative investor, you should probably seek opportunities that offer safety and some measure of control over your return - for example, savings or fixed deposit accounts with a guaranteed rate of return. Conservative investors may choose to miss some high-growth opportunities by keeping their money in investments with more secure rates of return. On the other hand, aggressive investors will take some chances with a volatile, or fluctuating, market in the belief that they have the opportunity to receive a greater return on their initial investment. Of course, there are investors who fall in between conservative and aggressive; they may choose to invest partially in conservative outlets and invest other funds in riskier ventures. For personal investing, you need to determine your own comfortable level of risk and select investments that match.

Contracts for Differences

A Contract for Difference (CFD) is a type of "derivative". The term derivative is very common and is used to describe any product that is based on an underlying instrument. Instead of buying a share and holding it, the CFD investor comes to a deal with a CFD provider that at the end of the contract, one side or the other will pay the difference between the opening price of the contract and the closing price. The investor can therefore trade in individual equities without the need to become a registered shareholder or take physical delivery.

When an investor starts a contract, the investor might only have to put up a small part of the contract value which may be between 10 and 20 per cent depending on the volatility of the share. This is known as a margin. However, the nature of the investment means that the investor's losses could eventually exceed the margin money - therefore brokers often insist that you deposit a minimum of £10,000 before trading.

Forward Contract

The sale or purchase of a financial instrument at the current (spot) price for settlement and delivery at an agreed future date. Unlike futures, forward contracts are not normally traded on an exchange.


Contracts that are made for the delivery of, for example, currencies or commodities on a future date. Future markets provide an opportunity for speculation, in that contracts may be bought and sold (with no intention of the traders to take delivery of the goods) before the delivery date arrives, and their prices may rise and fall during that time. Futures contracts are normally traded on an exchange.


An option gives the holder the right but not the obligation to exercise the purchase or sale of certain securities. An investor may pay a premium in return for the option to buy (a call option) or sell (a put option) a certain number of securities at an agreed price (known as the exercise price), on or before a particular date. The dealer may exercise his or her option at any time within the specified period and normally does so at an advantageous time depending on market prices. Otherwise the dealer may allow the option to lapse.

Spread Betting

Bets on moves in house price, bonds, currencies, shares etc. In spread betting you never actually own the share, commodity, or the bond that is the subject of the bet. Your bet is on the spread, not the underlying instrument. In this way a spreadbet is sometimes construed as more of a gamble than an investment. Spread betting carries a high level of risk to your capital. Prices can move against you and can result in substantial losses that may oblige you to make further payments. Unlike conventional betting, in spread betting you can lose more than your initial stake. Because of the volatility in the markets, spread betting is an investment mostly associated with experienced or professional investors who have an in-depth knowledge of the markets.