Unit Trusts – Collective Investment Funds
You can manage your own investments if you have the time and the expertise, but many investors work through a financial advisor who will work with fund managers to professionally manage collective investment funds. Money from many investors is pooled by a fund manager and then used to buy bonds, shares, property, cash assets or other various investment types. Unit trusts are a good solution if you want to make investments but don't have the knowledge, experience or interest in doing it yourself. As with any investment, you should understand that the value of your investment could go down as well as up, and before you decide on which company you want to use, you should carry out a broker comparison.
It works by you buying shares in a unit trust. The funds you put in are pooled with those from many other investors to invest in the underlying assets of that fund. Funds invest in different things, so whereas one might buy shares only in UK companies, others may invest in shares or bonds of foreign companies. You own a share of that overall unit trust and can either get regular dividend payments or let any profits be reinvested. You need to be sure about what risk you are prepared to take, so will need to find out what type of assets the fund invests in. It needs to suit your investment goals and your financial situation.
Stocks and Shares ISAs – Investments With Tax Advantages
In the UK, ISAs can be used for holding stocks and shares or cash. Known as ‘New ISAs', they were introduced in July 2014 and may be the right investment vehicle if you want to protect any interest or profits from tax. You can also protect dividends if you pay a higher rate tax, but this doesn't apply if you are a basic rate taxpayer. The current annual limit for an ISA is £20,000, and it is a useful investment if you are prepared to leave your money there for a few years, though you can still get access to it if you need to. You need to understand that the value of your investment may decrease depending on economic and financial market conditions. A Stocks and Shares ISA is often called a ‘tax wrapper' because it can round a number of different investment products. This means that any growth in the investment or interest earned within the ISA is not subject to tax. This type of ISA can hold a range of various investment types, including:
- investment trusts
- unit trusts
- individual stocks and shares
- exchange-traded funds (ETFs)
- Open Ended Investment Companies (OEICs)
- government and corporate bonds
The total of £20,000 permitted per annum for paying into an ISA cannot be topped up in the same tax year if it falls in value and if you have any unused allowance that cannot be rolled over into the following year.
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Property and Tax Investments
Property can be invested in either directly or indirectly, but you need to understand the tax implications of this type of investment. Property has often been seen as a safe haven for investors as it's generally expected that property prices will increase over the years. This is true up to a point because there are many fluctuations in the market, but it wasn't that long ago that buyers found themselves with negative equity when interest rates were much higher. However, it can be a sound investment if you buy in the right place at the right time, so it's worth getting a specialist to advise the best way forward for any such investment.
A direct property investment means that you buy all the property yourself, or a part of it. You can either live in it or rent it out and hope its value rises over time. If you invest in property indirectly, you don't own that property but will receive a share of any profits, so if you buy into a property company or fund you may get dividends when the fund makes a profit, and/or capital growth. However you decide to invest, you should be aware of any taxes that may need to be paid. If you sell a property you own, you do not generally have to pay Capital Gains Tax as you can claim Private Residence Relief, but you should get professional advice as to what other tax liabilities there might be.
Other Investment Vehicles: Investment Bonds
For a life insurance policy, an investment bond may be an appropriate investment type for you. You invest a lump sum into a number of available funds and you can either go for a fixed term or a fund that has no set term. When the bond is cashed in, your return will depend on how well the investment has performed. Investment bonds are for investors who want to put in a lump sum, usually a minimum of £5,000, that can be tied up for at least five years. Many investors choose to invest between £5,000 and £10,000 and the majority of these bonds are for whole of life. Although there is usually no minimum term, there are likely to be surrender penalties if you want to cash out in the early years.
You can choose the funds you want to invest in or your financial adviser can help you or choose on your behalf, and when the bond is surrendered, or at death, a lump sum will be paid out. How much that is will depend on the terms of the bond and its conditions and could also depend on the investment performance. There are two options for funds, either unit-linked or with profits; both of these have the same tax rules, so as income and growth is accrued in the fund you will pay tax on both. You can make regular withdrawals, but you should check what charges or tax might apply.
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Spread Bets and Contracts for Difference (CFDs)
If you are interested in high-risk but potentially lucrative investing, you could investigate spread betting and CFDs. For spread betting, you are effectively taking a gamble on whether a particular asset you have bet on is going to increase or decrease in value. For example, you could bet on the foreign exchange market and decide whether you think a particular currency will go up or down against another one. Currencies are traded in pairs, with popular ones being:
- US dollars and the Euro
- US dollars
- GB pound sterling
- US dollars and
- Canadian dollars
Most currencies can be paired, and markets can be very volatile, so you need to know what you are doing. Spread bets and CFDs are leveraged financial products, so you don't have to put up the full value of the underlying exposure. As a high-risk way of investing, you should do your research and gain experience by opening a demo account with a reputable broker. Much of this trading is done online and you can find tutorials and more on the website of the broker you decide to sign up with.
Contracts for difference is a similar type of contract where you initiate a buy or sell position and when the position is closed it is settled with cash. The tax treatment of the two is different, so you could be liable for Capital Gains Tax when using CFDs whereas you aren't for spread betting.
Gilts and Corporate Bonds
Bonds are fixed interest securities and are one way that governments and public or private companies can raise money, borrowing it from investors. Effectively, you are lending your money either to a government or company and will expect a return from your investment. These types of securities issued by the UK government are known as gilts, or gilt-edged securities, and those issued by companies are called corporate bonds. This type of investment may be useful to hold as part of a portfolio of investments as they are usually thought to be a lower risk than other various investment types, spread betting and CFDs in particular. Gilts are probably the least risky as they are backed by a government, and most governments are unlikely to go bankrupt, ensuring you will get a return at the end of the fixed period. That return, in terms of interest, is likely to be lower than many other types of investment, but they add a degree of security to your investment basket.
Corporate bonds have a slightly higher element of risk because you are dependent on how well the company performs. Holding gilts or corporate bonds will, in most cases, provide you with interest for as long as you hold that security, providing you a fixed amount of money at regular intervals. Investing in gilts may not always be a safe haven as returns can depend on interest rate changes, so use a professional adviser to discuss your portfolio development options.
Trading in Cryptocurrencies
Cryptocurrencies are another high-risk way to invest and are currently unregulated and a type of digital money that is not always easy to spend. One of the best known is Bitcoin though there are many hundreds of others, including Ethereum, Litecoin, Ripple and Bitcoin Cash. These virtual currencies can be exchanged in the same way as normal currencies that are traded on the Forex market. There is no physical money such as notes or coins attached to cryptocurrencies and the only record of transactions is digital, this record is often referred to as a blockchain. This provides a historical record of any transaction made and is verified by every computer in the network. No cryptocurrency is guaranteed or issued by a public authority or central bank, so if anything goes wrong there is no compensation available.
Many people use cryptocurrencies because they are secure, fast and cheap, but there are inherent risks in trading, and as transactions are anonymous, they have been used by criminals who are trying to avoid being detected participating in unlawful activities. Because the cryptocurrency market is quite unstable and can be affected by hacking, you could make a lot of money quickly or, equally, lose a lot.
Where is Best to Invest?
Everyone has different investment goals and there are no hard and fast rules about where or how you should invest. It will depend on a number of factors:
- What is your attitude to risk?
- How much do you want to invest?
- Are you looking for short-term or long-term investments?
- Are you looking to trade yourself or work with a broker and adviser?
Any investor should develop a portfolio of investments and mix low, medium and high-risk options, though if you're not sure about high-risk then low and medium can still provide good returns. The all the eggs in one basket option is not a sensible strategy as if something goes wrong with that investment you could be left badly exposed. By building up a diverse portfolio using an experienced broker, you can grow your money and then invest in further assets over the years. You have many investment options, so explore them all before deciding where your money goes.