Cash – Cash is generally considered to be the safest of the asset classes. Cash funds pay a rate of interest which can go up and down daily. Cash funds are often invested in bank deposits and are generally regarded as safe. However, the returns you receive might not be very attractive over the long term.
UK Goverment bonds – These are sometimes called gilts or gilt edged securities, and are loans to the UK Government. The UK Government (as the issuer of the bond) agrees to pay a fixed rate of interest and to repay the loan at the end of a fixed term. UK Government Bonds are relatively secure since the interest rate is fixed. However, the actual price of the bond can go up and down.
Corporate bonds – These are similar in structure to government bonds but they’re issued by companies. These are generally riskier than government bonds but carry the potential for higher returns. There are different categories of corporate bonds. Investment grade bonds are judged to be very likely to meet their payment obligations. Riskier high yield, or junk, bonds are not.
Equities – Often referred to as stocks and shares, these are shares in companies. Shares are traded on stock markets and the share price can go up and down on a daily basis. Companies usually pay a dividend to share holders. Equities are generally considered to be the riskiest mainstream asset class. Overseas Equities provide some spread of risk but add currency risk.
Individual Savings Accounts (ISAs)
– Stocks and shares ISAs let you invest up to £10,200 a tax year. You don’t pay any personal tax on the growth in value of an ISA.
Investment trusts – These are companies which exist solely to invest in the shares of other companies. Shares in investment trust companies are traded on stock markets. Returns on these investments are normally subject to capital gains tax.
OEICs (Open Ended Investment Companies) – These are a type of collective investment scheme and fund management companies usually run them. Your investment buys you shares in these schemes. The price of the shares can change daily, up or down, according to changes in the value of the assets they’re invested in. One advantage which OEICs have over investment trusts is that they can invest in different asset classes such as bonds and property. In this way they can spread the investment risk. Returns on these investments are normally subject to capital gains tax.
Investment bonds – These are really life assurance plans with a large investment element. Like OEICs, they give you the opportunity to invest in a range of asset classes at the same time, spreading your investment risk. Returns on these bonds are normally paid net of basic rate income tax.
Structured products – These are usually fixed term investment products which offer performance related to equity returns but aim to provide protection of the original amount invested as long as you keep your money invested for the full term. Returns on these investments are normally subject to capital gains tax.