Investment vehicles

There are many forms of investment, however, the following are some of the more commonly held by investors.

Cash Accounts
It is important that sufficient funds are retained on deposit to cater for an investor’s short term needs. There is a wide variety of instant access savings accounts, offered by both high street and online institutions, which offer competitive interest rates.

Single Company Stocks & Shares
Over the years many people find that they have accumulated various single company shares. Unless such a portfolio consists of a large number of individual shares and is carefully managed, the lack of diversification constitutes a high level of risk. Collective or pooled investments on the other hand, such as Unit Trusts, which invest in a large number of companies by default offer not only the necessary diversification, when actively managed by a professional, but can be more effective in the management of capital gains.

Unit Trusts & Open Ended Investment Companies (OEICs)
A Unit Trust or OEIC allow individuals to participate in a large portfolio of various assets. These could range from Money Market (cash) assets to shares in UK or foreign companies. Units or OEIC shares held by investors represent fractions of a portfolio typically comprising of 50 to 100 company holdings.

There are many different categories of Unit Trusts and OEICs, ranging from the very general funds to some very specific funds, which concentrate on a specific geographical region, sector or industry.

Some managers also adopt a fund of funds approach, whereby investment is made in a range of other pooled schemes. This creates a well diversified spread of holdings combined with using the ability of the best fund managers in their respective areas. As a result this umbrella concept gives rise to not only to a more diversified portfolio but also a less risky proposition than investing in a single Unit Trust or OEIC.

Investment Trusts
Investment Trusts are companies quoted on the London Stock Exchange, which invest shareholders’ funds in the shares of other companies. They differ from Unit Trusts or OEICs in that there are a fixed number of shares in issue. The price of the shares is determined like other quoted shares - by supply and demand. Another significant difference is that Investment Trusts are also permitted to borrow in order to boost the return. Consequently, when an Investment Trust is performing well shareholders enjoy an enhanced or ‘geared profit’, however if an Investment Trust performs poorly then the loss is similarly exaggerated.

Individual Savings Accounts (ISAs)
ISAs were introduced in April 1999, and are effectively ‘wrappers’ which provide exemption from Income Tax and Capital Gains Tax for most investments. Annual contribution levels for the 2006 – 2007 Financial Year are as follows:

Maxi Stocks and Shares ISA - £7,000
Mini Stocks and Shares ISA - £4,000
Mini Cash ISA - £3,000

Current tax levels and reliefs will depend on individual circumstances; however, the 10% tax credit is no longer reclaimable on equity distributions within the ISA. A 20% income tax credit will continue to be reclaimable in respect of Cash Funds and Corporate Bond Funds by non tax payers as well as for the holdings within the ISA.

Insurance Company Investment Bonds
Investment bonds are collective investments issued by life assurance companies and are single premium life assurance policies. In order for such policies to qualify for the tax regime applicable to life office funds the life assurance element is typically 101% of the fund value. The actual funds available through investment bonds are very similar to Unit Trusts and OEICs, however the main difference between the vehicles relates to the taxation of gains within the fund and on payments made to the investor. For this reason it is important to seek advice as to the most suitable form of investment as it will be depend upon an investor’s personal circumstances.

Wrap Services
Instead of investing directly with a number of different fund managers or dealing with various company registrars, professional advisors often use wrap accounts or investment platforms to create bespoke portfolios for their clients.

Essentially, this simplifies the reporting process as all information us gathered in one place and issued by one provider. Many companies offer wrap services, with varying levels of sophistication, the selection of which would depend upon your individual circumstances.