Guide to investments

Having large sum of money or some spare money each month is a nice feeling. But what are you going to do with it? You could spend it, save it – or invest it. If you want to invest it, you’ll want to understand what that means.

The first thing to understand is that there is a risk with almost every type of investment. It may just be a small risk, but you should be aware of it all the same. And with some types of investment there’s no guarantee that your money will grow or even that you’ll get it all back.

Investment plans generally invest in at least type of ‘asset’ (such as equities or bonds). The amount of risk involved will depend on what type of asset or range of assets you’re invested in.

Even within the same asset class there can be different levels of risk. The shares of large companies, for example, are generally thought to be less risky than smaller company shares.

If you invest in funds or shares that are in a different currency, such as euros, yen or US dollars, the value of these funds will change if there are changes in exchange rates.

Some types of investment plans have features that reduce risk. They can do this in different ways, such as investing in a wide range of different types of assets or just investing in those asset classes with a lower level of risk.

The level of risk you’re prepared to take will be very much an individual choice. Companies which sell or advise on investment products will give clear warnings of the risks associated with them.

• Why invest?

Whether to invest your money, or keep it in a bank account, will depend on your attitude to risk and whether or not you need to get your hands on your money at short notice.

If you can’t afford to take any risk, and want access to your money at short notice, you may be better keeping it in a bank savings account.

But if you want more investment variety, and the opportunity for more growth, there’s a wealth of investment products to choose from.

There are two main reasons why people invest – to watch their money grow or to use their investment funds to produce an income.

If you want to invest for growth, you’ll want to get the best possible return on your investment that’s available, according to the level of risk you want to take. Equity funds and commercial property bonds are usually considered to provide the greatest opportunity for growth, but are also considered the riskiest investments.

Some investment products let you structure your investments to match the level of risk you’re prepared to take. They do this by investing in a broad portfolio of equities, government and corporate bonds, property and cash.

Many people who are in or approaching retirement have a lump sum to invest. This could be from a pension scheme or the profit from a house sale. Often, they’ll be looking for an investment which pays them a regular income without too much risk to their original investment.

Cash deposits and government bonds can both be widely used to generate income payments. Cash deposits are very low risk, while government bonds are generally considered to be low risk investments.

• Investment assets

Investment products invest in different types of investment assets. The most commonly used types of asset are:

Cash is generally considered to be the safest type of investment asset. Cash funds pay interest on your investment. The rate of interest can go up and down daily. Cash funds are invested in bank deposits and are generally regarded as safe.

However, the returns you receive might not be very attractive over the long term.

These are loans to the UK Government and are sometimes called gilts or gilt edged securities. The UK Government pays a fixed rate of interest to the bondholder for an agreed period of time. The UK Government also agrees to repay the loan at the end of a fixed term.

Since the interest rate is guaranteed, UK Government Bonds are relatively secure. However, the price of the bond can go up and down.

These are like government bonds but they’re issued by companies. They are generally riskier than government bonds since they don’t have Government backing. However they do have the potential for greater returns.

There are different types of corporate bonds. Some are known as investment grade and they are judged to be very likely to meet their payment obligations. Others, sometimes called high yield, or junk, bonds are not.

Equities are quite simply shares in companies and often referred to as stocks and shares. They are traded on stock markets. The price of equities can go up and down on a daily basis. Companies usually pay a dividend to share holders twice a year.

Equities are considered to be the riskiest type of asset to invest in. Overseas Equities provide some spread of risk but add currency risk.

• Investment products

Once you’ve decided what type of asset is best to meet your needs, you have to consider which investment product is most appropriate. The main ones are:

A stocks and shares ISA lets you invest up to £7,200 a year. You don’t pay any personal tax on the growth in value of an ISA or any income you take from it.

• More on stocks and shares ISAs in our ISA guide

Investment trusts are companies which invest in the shares of other companies. When you invest in an investment trust, you are buying shares in the company. The shares in investment trust companies are traded on stock markets. Returns on these investments are normally subject to capital gains tax.

These are a type of collective investment scheme and fund management companies usually run them. Your investment or regular saving buys you shares in these schemes. The price of your share goes up and down, broadly in line with changes in the value of the various assets the OEIC is invested in.

Unlike investment trusts, OEICs can invest in different types of asset such as bonds and property. This means that they can spread the investment risk and offer you a more balanced approach. Returns on OEICS are normally subject to capital gains tax.

These are life assurance plans which have a large investment element. Like OEICs, they let you invest in a range of assets at the same time, spreading your investment risk. Returns on these bonds are normally paid net of basic rate income tax.

These are usually fixed term investment products. Often the return under these products is linked to the performance of a stock market or a group of shares. They frequently aim to provide protection of the original amount invested, provided you keep your money invested until maturity. Returns on these investments are normally subject to capital gains tax.

• Common questions

• How do I know what the value of my investments is?
• What limits are there on how much I can invest?
• Can I get my money if I need it?
• Am I better keeping my money in the bank?
• I want to invest directly in company shares and other specialist investments. Can you help me?
• I need advice about the right investments for me. Where do I get it?

A. You’ll find share prices and unit prices published daily in many national newspapers and on internet sites. Most investment product providers will also keep you up to date with your investment’s value by sending you an annual statement.

A. You can invest £7,200 each tax year (6 April to 5 April) in a stocks and shares ISA. See the ISAs made easy guide for more information on ISA limits. Most other investment products will have a minimum investment but usually no upper investment limit.

A. Yes, you can normally cash in any investment whenever you want, minus any applicable exit penalties. With most products you’ll get the current market value of your investment, but it’s important to remember the market value of your investment may be less than you invested. Also, if you invested in a fixed term or a structured product you might not get all your money back if you cash in before the end of the fixed term.

A. If you can’t afford to take any risk at all, you’re probably best keeping your money in a bank account. But remember that inflation will reduce the real value of cash over the long term. Most investment products don’t offer the same security as a bank account but can offer you greater potential rewards.

Quite naturally, the highest risk investment products offer you the highest reward potential. But you should consider them as long term investments – five years or more. Finding the right balance between saving and investing depends on your individual needs, your attitude to risk and the potential rewards.

A. Yes, the RBS Share Dealing service offers a range of services to people who want to invest in equities and specialist investment products.

• RBS Share Dealing

A. RBS Financial Planning Managers are professionally qualified to give advice on a range of investment and personal finance products. Contact us to arrange a no obligation financial planning review.