Why should you make a lump sum investment?

Investing a lump sum is advantageous as you will gain exposure to the markets as soon as the money is moved, instead of using a regular savings plan where it’s common to drip feed a smaller amount in to an investment over a regular period of time. With interest rates at all time lows, leaving surplus cash in the bank will slowly get eroded by inflation, which means making lump sum investments will either keep up with inflation, or in some cases grow your capital and/or provide you with an income.

Types of fixed interest

Fixed Deposit Accounts

A fixed term deposit is where an amount of cash is held at a financial institution in return for interest on an annual, bi annual or quarterly basis. They are generally low risk and have maturities ranging anywhere from a month to a few years. When a term deposit is purchased, the money can only normally be withdrawn after the predetermined term has ended or by giving a specific number of days notice. If this agreement is broken, often the institution will reduce the amount of interest payable.

Fixed Term deposits are attractive to investors who are looking for the best interest rates on cash deposits, and don’t mind tying up their money for a set period of time. These are relatively low risk investments but the returns are also very low, especially in todays economic climate where interest rates are almost zero.

Structured Notes/Fixed Income with protection

The retail market for structured notes has been rapidly growing in recent years. These products often have reassuring names that include some variant of “principal protection or “capital guarantee,”. It is important to note, just like any type of investment, that they are not risk-free, and it is vital that the investor knows the risks before investing their money.

In short, a structured note provides the investor exposure to specific indices whilst at the same time offering an element of capital protection. They are designed to return the original investment at a set maturity date—typically ranging up to (5?) years from issuance. In addition to returning the capital at maturity, they will also pay coupons/dividends periodically. Some structured notes also have an option to mature early. The main reason for their popularity is their nature to give the client a fixed return, even if markets are falling. Although it is important to fully read the terms and conditions, these can be a valuable asset when diversifying a portfolio. Like with most investments, the creditworthiness of the issuer is also very important. If the issuer goes bankrupt, you could lose some or all of your money, so its vital you check who they are. Additionally, structured notes are often linked to several indices, or underlying’s; for example the FTSE 100 or the S&P 500. If these markets stay within predetermined parameters, then normally a fixed income is paid, and if they grow, then the product may mature early.

Government Bonds

A government bond is a debt security issued by a government to help support government spending. Simple put, an investor would lend money to a government in return for a fixed rate of interest, and then return of capital on a specific date.

Before investing in government bonds, investors need to assess several risks associated with the country, such as country risk, political risk, inflation risk and interest rate risk, although the government usually has low credit risk. Government bonds are actually known as ‘risk free’ and are used in many calculations in economics and investing for this purpose. The reason they are known as ‘risk free’ is simple because the chance of a government defaulting is extremely low.

Corporate Bonds

A corporate bond is exactly the same as a government bond, except the money is being lent to a company instead of a government. Therefore you would expect the yield, or return, to be higher. As a rule of thumb, the smaller the company, the higher the risk and return, and the larger the company, the lower the risk and return.

Exchange Traded Funds and tracker funds

Exchange Traded Funds (ETF’s) and tracker funds have become more and more popular in recent years due to their low cost. They are both types of passive investments that replicate the movement of a particular index.

Their goal is to deliver a return that’s in line with the performance of the specific index, whether that index is a well known stock market such as the FTSE 100 or S&P500, or the price of Gold, Silver or even Oil.

The amount of funds invested into ETFs in 2017 topped $48.26 billion worldwide.

Passive investments offer a low cost, diversified and simplified way to invest in a range of indices, and appeal to investors who don’t believe it’s consistently possible for a fund manager to outperform a specific market.

Passive investments costs are typically lower than active funds, mainly die to the fact that their fees do not include paying for the skill of a fund manager to pick stocks in the hope of beating the market.

The main difference between ETF’s and tracker funds is that ETF’s are traded on stock exchanges, meaning that prices change continually throughout the day, and they can be bought and sold like shares.

In comparison, tracker funds are structured as a unit trust or open-ended investment company (OEIC), and priced once a day.

Mutual Funds

A mutual fund is an investment vehicle that pools your money together with other investors to purchase shares of a collection of stocks, bonds, or other securities, referred to as a portfolio. The fund is managed by a professional fund manager who allocates resources in order to produce capital gains and/or income for its investors.

The goal of a mutual fund is to beat its relevant benchmark, and this is achieved by the fund manager making wise decisions to buy and sell specific securities, supported by a team of researchers.

Mutual funds are an example of active investing, as oppose to passive, and are very popular among investors.