Regular Investments

Regular investment is perhaps best viewed as savings with a bit of imagination. Traditionally, many of us have tucked away a small sum each month into a building society or post office savings account. Whilst this is still a very good habit to be in, it is possible to increase our returns quite significantly on even relatively small sums of money.

When thinking about building up a portfolio of regular investments, the first thing to establish is your attitude to risk. This will largely define the type of portfolio or fund you choose.

The different options discussed below come with a wide spread of risk and return. However, even if you are naturally cautious with your money or just starting out in the investment market, there are options that will still offer you a better return than a basic building society savings account, and for a minimal amount of risk.

FRIENDLY SOCIETY TAX EXEMPT SAVINGS PLANS

For all intents and purposes, these plans are the same as a mortgage endowment policy as there is no requirement to pay tax on the proceeds when they mature. As with a endowment policy, the value of the 'with profits' version of this plan is that the total fund should grow in line with the addition of any annual bonus. At present, you are allowed to invest a maximum of £25 per month tax-free in this scheme.

INDIVIDUAL SAVINGS ACCOUNT (ISA)

ISAs represent the best tax-efficient investment after pensions. At the moment, you can invest up to £7,000 a year in a maxi equity ISA in either investment or unit trusts or an OEIC (Open Ended Investment Company). Alternatively, you can invest in a maximum of three mini ISAs up to a limit of £3,000 each in an equity or cash ISA and £1,000 in an insurance ISA. In 2002, the limits are set to drop to £5,000 for a maxi ISA and £1,000 for a cash ISA.

It is possible to invest up to £9,000 of a maturing TESSA (Tax Exempt Special Savings Account) in what is called as TESSA-ISA. This is in addition to any other ISAs you may have. There is a time limitation on this movement so it is necessary to check details with your financial adviser.

NATIONAL SAVINGS

National Savings issues represent save investments with a reasonable yield. Children's Bonus Bonds, for example, currently attract a tax-free return of 5.25% compound when held for five years. They can be purchased for any child under the age of 16 by anyone over 16, but remain controlled by the investor until the beneficiary reaches the age of 16.

INDIVIDUAL SHARES

Playing the stock market in this way carries inherent risk and must be planned over a number of years to allow for periodic downturns in the market. Unless you are very fortunate, share dealing rarely yields short-term returns.

COLLECTIVE INVESTMENTS

Collective investments are a form of investment whose value can go down as well as up, and thus carry a degree of risk. For this reason, as with share investment, they should be treated as a medium- to long-term option. Funds are invested in a unit trust, an OEIC (Open Ended Investment Company), an investment trust or in 'Zeros'.

Unit trusts and OIECs are effectively pooled funds where investors buy units at a published price, hold them until their value has increased, and then sell. The fund managers buy assets in different equities within their remit: the fund is wholly reliant on the performance of those assets. The fund is called 'open' because there is no limit on the number of investors. The more people invest, the more money the fund has to invest on their behalf.

An investment trust is a free-standing company in its own right and invests in other companies. It has its own independent board of directors and a pool of shareholders, just like any other company. An investment trust either maintains its own salaried team of fund managers or, more often, sub-contracts the business of investment to a specialist fund management company.

'Zeros' are zero dividend preference shares, as well as being a form of investment trust. They are called zeros because they pay no dividend (and you thus pay no tax) during their lifetime. You only pay tax once they have matured - typically after seven years - and then only if the income you receive from them exceeds the Capital Gains Tax threshold, currently £7,200 per annum. A further advantage of zeros is that you can choose when you want them to mature, timing them to coincide with specific periods of need: children starting at school, going off to university, marrying, or buying their first house. If you are considering investing in zeros, it is vital to be aware that they carry no guarantee of paying anything at all once they have matured.

SUMMARY

Most forms of regular investment can be used either for growth or income, or a combination of the two, depending on your individual requirements and the time scale you have available. Because each form of investment carries its own balance of risk and yield, as well as flexibility on how much and when you pay, you would be well advised to take independent financial advice before deciding which form of regular investment best suits your requirements.

There are many more possibilities and variations on compiling a portfolio of regular investments than are given above, including planning such things as an ethical investment policy or setting up a trust fund for your children or grandchildren. If you would like to discuss any aspect of regular investment, in confidence and with no obligation, please contact one of our investment specialists.