The following are a number of key issues that
are relevant to investment choice:
- Client's financial aims and objectives.
- Savings/investment period: short-term,
medium-term, long-term. What amount of cash would you need
to cover unexpected emergencies?
- Level of risk/Client attitude to risk:
100% capital security, medium level risk with the chance
of earning an above average return, high risk with no upside
or downside on the return or ultimate value of the initial
investment e.g. stock market investments.
- Taxation implications: what is the most
tax efficient choice?
Interest rates are at 40-year lows. Nevertheless,
you will earn a better rate by choosing periods of say 30,
45 or 60 days compared with using a demand deposit account.
Medium and Long-term Options
When comparing interest rates, it's important
to check the Compound Annual Return (CAR). A 3-year return
of 18 per cent is not the same as 6% per annum, because of
the effects of compound interest.
If security is important, a Fixed Rate Bond can be a good
choice as you will receive a fixed interest return, after
an agreed number of years.
Tracker Bonds are popular medium term investment
products that can provide 100 per cent security or at least
a fixed percentage of the capital guaranteed. Trackers are
generally based on the performance of one, or more international
stock markets. The key issue with Trackers is the performance
of the chosen markets and the lock-in of your investment for
the agreed period.
In preference to investing directly in the
stock market, there is the option of pooled investments via
Unit Trust or Unit Linked Funds.
These investments can be in shares, State
fixed-interest bonds and property. A certain number of units
are purchased in the fund with your investment. A Fund Manager
manages the fund which can go up or down in value, depending
on the changes in the value the underlying assets. The principal
difference between a Unit Linked Fund and a Unit Trust is
that the Unit Linked Fund has a life insurance policy attached
Depending on the degree of acceptable risk, an investment
mix ranging from spectrum of a zero risk fixed interest fund
to for example a high risk Japanese equities fund, with much
to choose from in-between, can be recommended to the investor.
The 3 categories of Unit Trust and Unit
Linked Funds are:
- Secure Funds (low risk) where investments
have 100 per cent security (short of a collapse of the financial
- Balanced Funds (medium risk) these investments
are made in a wide range of domestic and overseas assets,
with the objective of achieving enhanced capital growth.
- Specialist Funds (higher risk) These investments
are made in a specific asset, e.g. shares or property; or
a specific region e.g. Ireland, UK, US, Ireland to achieve
high long-term growth.
With Profits Bonds/Policies
The decline in equity returns is prompting
life insurers to consider withdrawing from the 'with profits'
product market. However, there are some Assurers still left
offering reasonably good initial gurantees - most notably
Hibernian Celebration Bond.
Investors in with-profits policies, such as
lump sum with-profits bonds or regular payment endowments,
receive two types of bonus. Once paid, an annual bonus cannot
be taken away provided the policy is held to maturity. However,
insurers are under no obligation to pay any terminal bonus,
whatever the estimates that are given in annual policy statements.
Some life companies have cut these bonuses four times in 2001
and the reductions are having a significant impact on maturity
values. The penalties for surrendering policies early have
also been increased.
The life insurers 'smooth out" bonuses
in the good years so that payments can be made in bad return
periods. However, the sharp decline in equity values has prompted
the steep fall in bonus values. However, in the light of many
of the poor current returns in equity unit-linked investment
bonds the with profit bonds still appear good value. Here,
the stronger the financial position of the with profit life
company, the greater is its ability to weather the downturn
in the investment market.
us for a personal investment report.
Warning: The value of your investment
may go down as well as up. You may get back less than
you put in.