First, ask yourself what kind of yield you need from your capital. By Andrew Couchman
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The Independent Culture
THE DEPRESSING thing about investing for income is just how many investment pounds are needed for each pound of income. Falling yields and low interest rates may be good news for mortgage borrowers, but not for many investors.

Yet there is now more choice than ever when it comes to investment products that generate income. So what should you do if you are putting together a portfolio for income generation?

For most investors, keeping a significant cash float will always make sense and recent market volatility has seen the banking brigade doing rather better than their stock-market cousins.

But over the long term, deposit accounts suffer two major problems. First, income will rise only if interest rates do, and no capital growth means that both the capital held and the income are in fact falling in value in real terms. Second, if interest rates fall, then so does the income.

Countering these disadvantages means looking at other types of investment that can generate rising income and, hopefully, rising capital as well. Before looking at individual investments, David Burren, a Cheltenham- based independent financial adviser at Warwick Butchart, suggests asking four key questions:

n What is the minimum income you need? It may seem strange to ask this, rather than what is the best return you could get, but the lower your minimum requirement, the greater the potential you have for capital growth as well.

n Do you want your income to grow? If inflation ran at 3.4 per cent a year for the next 20 years the real value of your capital would halve, and so would the value of any fixed income. Many people now retiring can expect to live for more than 20 years, so inflation, even at today's levels, can still be a real problem.

n What is your attitude to risk? If you cannot bear the thought of the value of your capital ever falling, then perhaps a deposit account is still the best bet. However, even the most risk-averse people accept fluctuating capital values, and they do so in what is often the biggest asset they hold - their home.

For the majority of people it is both the degree of risk, and the spread of risk, that are important. With an investment portfolio of, say, pounds 50,000 there can be room for high-risk, high-yielding investments, as well as fixed interest deposits.

n What do you think will happen in the future? If you believe that inflation and interest rates will fall or rise in the future, that will affect where you invest. While professional advisers can, and do, speculate on what might be going to happen, even they can be wildly inaccurate, especially over the short term.

What is important is how you feel about your investments, and whether you could sleep soundly at night if you were sure that inflation would rise when your financial adviser was convinced of the opposite.

You may also know about some forthcoming likely pay-out, perhaps a once in a lifetime holiday or a daughter's wedding - or a likely capital receipt, such as an inheritance or a business sale. Both events could change your income needs.

Once you have determined what your needs and your views are, that is the time to seek professional advice. Even experienced investors value getting a second opinion, and it is all too easy to forget one simple fact, which could radically change what your investment portfolio should look like. For example, you may have made your mind up to switch money out of a Tessa into a corporate bond, but perhaps you have omitted to take into account any penalties for switching.

David Burren expresses caution, too, when it comes to moving into any new investment. "One of the best tips is normally to look not only at an investment's record, but also at the breakdown of its investment portfolio," he says.

"Recent events in the market, though, can negate all that. If you are looking at a fund that a month ago was fully invested, you need to know whether that is still the case today. A good investment adviser should be up to date on what investment managers are thinking now."

Where to Put

Your Cash

SOME OF the main types of income-producing investment schemes are as follows

Income unit trusts

Pooled investment in equities that have above-average yields. These have a good prospect of capital growth.

Investment trusts

Companies that invest in equities. Some are geared towards producing higher income.

Income bonds

Insurance-linked investments that offer guaranteed income for a fixed period. On some, return of capital may be dependent on share prices.


Government-backed fixed interest investment. Capital can go up or down. Usually have a fixed maturity date.

Corporate bonds

Like a gilt but you are lending money to a company so the risk and the return can be higher.

Deposit accounts and

National Savings

Variable interest, but capital is protected.


Pays an income until you die when capital is then usually lost.

Note: as a general rule, the higher the income, the higher the investment risk.