Four per cent – that's the figure to beat

In spite of the current state of the stock market, there are still ways for investors to better inflation, as Chiara Cavaglieri and Julian Knight report

You'd be forgiven for thinking your sock drawer is the safest place to hide your cash in the wake of the current stock market collapse.

But cash at home is hardly safe, and with inflation exceeding 4 per cent, any money not earning a good rate of return is actually losing value. So here are some options for your cash – some safer than others, some traditional choices, others more left-field – together with performance ratings of their likelihood to beat inflation.

National Savings

Safety 10/10, performance 7/10

For many people, good old National Savings & Investments (NS&I) is the first port of call for safer savings, with a 100 per cent guarantee backed by the Treasury. The good news is that many of the products are top notch, with the index-linked savings certificates among the most popular savings accounts offering a very rare opportunity to beat inflation with tax-free returns. These certificates pay 0.5 per cent above the rise in the retail prices index (RPI) on maximum investments of £15,000 per saver, if held for at least five years. However, while inflation-proof savings are appealing now, there is no guarantee that they will offer a better overall return than a fixed-rate bond with a high street bank. NS&I also falls down on some of its other products, namely premium bonds, which are really just a punt on getting lucky.

"Premium bonds may be safe, but with the annual prize fund interest rate set at 1.5 per cent, unless you're very lucky, you'd be better off with a savings account," says Andrew Hagger of Moneynet. "The odds of winning (per £1 unit) are 24,000 to one."

Fixed-rate savings bonds and cash ISAs

Safety 9/10, performance 6/10

Returns of up to 4.75 per cent are available on long-term fixed-rate bonds, with Whiteaway Laidlaw Bank paying the top rate if you invest at least £5,000 for five years, but you still need to factor in the rising cost of goods and tax. And, if you want to tie up your money for only one year, the top bond from United National Bank pays a meagre 3.51 per cent.

"These accounts don't pay sufficiently to protect your savings from the impact of tax and inflation. You need a gross return of 5.25 per cent (or net return of 4.20 per cent) to maintain the spending power of your cash nest egg," says Mr Hagger.

If you haven't used up your allowance, the tax-free status of ISAs make them better performers than standard fixed-rate bonds – you can get a net return of 4.65 per cent with Birmingham Midshires for a five-year fixed-rate ISA – equivalent to 5.8 per cent gross for a basic rate taxpayer and 7.75 per cent for a 40 per cent taxpayer.

Bonds and ISAs are usually covered up to £85,000 by the Financial Services Compensation Scheme. However, this is limited to each authorised provider. So, if you have several accounts with one bank the protection limit is combined. To make things more difficult, some of the big names on the high street all come under the same institution, so if you have money with Halifax, Bank of Scotland and Birmingham Midshires, which are all part of the HBOS group, your cover for all those accounts will be limited to £85,000.

Gilts and corporate bonds

Safety 7/10, performance 7/10

Gilts and corporate bonds are a half-way house between holding cash in a bank or building society and shares. You can invest in gilts, bonds issued by the Government, via a stockbroker or directly from the Government's Debt Management Office (dmo. gov.uk). With UK corporate bond funds, such as M&G Corporate Bond and Fidelity Strategic Bond, you are investing in a form of debt issued by companies instead and these are only as safe as the company issuing them.

"For me, these have been the stars over the past week or so. They have shown what an important part they play in any well-diversified portfolio," says Jaskarn Pawar from independent financial adviser Investor Profile. However, he warns that there remains some uncertainty as to the long-term value of long-dated bonds and gilts, and prefers short-dated bonds and gilts, such as the Dimensional Global Short-Dated Bond fund, the iShares FTSE Gilts UK 0-5 and the iShares Markit iBoxx £ Corporate Bond 1-5.

Guaranteed equity bonds

Safety 5/10, performance 5/10

With guaranteed bonds and other structured products, you are offered fixed-term products that benefit from stock market exposure without having to put your capital at risk. So, if prices go up, you're quids in; and, if they go down, your original investment is safe – certainly an appealing notion right now.

The word "guarantee" is somewhat misleading when talking about these products, however, as some may keep their promise only if conditions are met – for example, if the FTSE 100 index doesn't fall by a certain amount. If markets fall and you do get your capital back, you lose money in real terms when you take inflation into account. Critics say that structured products are often overly complicated, relatively high risk and may offer disappointing returns because any growth excludes dividends. There are also harsh penalties for anyone who fails to see their plan through to the end. Even worse, the underlying assets may be held with an institution that is unstable and goes under, as with structured products that were linked to Lehman Brothers.

Absolute return funds

Safety 5/10, performance 6/10

By using hedging techniques, these funds are designed to produce positive returns in all market conditions. The sector saw a surge in popularity when stock markets collapsed. The funds use a complicated mixture of two investment strategies, the ability to go long and short, aiming to profit from falling markets.

Don't let the name fool you, though: an absolute return is not a cast-iron promise and several funds have failed to live up to expectations when put to the test. Backing the right fund manager is crucial. You will also need to fork out for annual fees as high as 2 per cent and a cut of any positive returns. "I worry about absolute return funds. I find them a strange offering. They basically try to guarantee relatively low returns for relatively high risk and relatively high cost. That's not a very attractive opportunity to me," says Mr Pawar.

Precious metals

Safety 4/10, performance 8/10

When markets are in trouble, commodities can be appealing because they do not necessarily depend on the financial position of companies and governments. Gold prices have soared, and investors are pouring money into exchange-traded funds as a cheap and easy way to gain exposure. Experts say that funds investing in gold-mining companies are looking undervalued and many recommend long-standing funds such as BlackRock Gold & General.

With a finite supply, the long-term investment prospect looks good. But because commodities and precious metals are so heavily traded, be prepared for volatility. It should make up only a small part of any portfolio. It also pays to remember that commodities will always be linked to the basic economics of supply and demand, so you will need to pick carefully.

"Commodities tend to do very poorly in contractions, or times of high risk aversion, due to the potential for lower industrial demand," says Nik Stanojevic, equity analyst at Brewin Dolphin. "Conversely, precious metals tend to do very well during these times and are frequently used by investors as 'portfolio insurance'."

Wine

Safety 4/10, performance 8/10

Investing in fine wines is hardly risk-free but with the benchmark index, the Live-ex 100, up 6.8 per cent on the year to date and 19.3 per cent year on year, the returns are difficult to argue with. With a broad mix of countries, including China, now buying heavily into wine, it shouldn't be dismissed as an alternative to the stock market.

"While we may see prices soften a degree this month, it's worth noting that wine shows a 15-plus per cent annual growth since 1990, and that returns have been generally stable," says Joe Marchant from Bordeaux Index.

The advice is to pick only reputable merchants and to stick with Bordeaux – the FTSE 100 of the wine world – for your first investments. Prices have risen sharply in wine in recent years and some suggest that this market has the hallmarks of a bubble.

Expert View

Andrew Hagger, Moneynet

For the seasoned investor, a volatile stock market is often viewed as an opportunity to make greater medium- to long-term returns. But the huge daily swings we've witnessed over the past week would be too much for your average saver to stomach.

Savings rates from banks and building societies may be very low. However, it is the safety of capital that is paramount for many consumers. A rate of 3 per cent or so on your savings suddenly doesn't look so bad when you compare it with the losses some investors have suffered this month.

Independent Partners; request a free guide on NISAs from Hargreaves Lansdown

Life and Style
tech

Sales of the tablet are set to fall again say analysts

News
A Brazilian wandering spider
news

World's most lethal spider found under a bunch of bananas

Life and Style
fashion

British supermodel and hitmaker join forces to launch a 'huge song'

News
news

The Duke and Duchess of Cambridge announce they are set to welcome second child in spring

PROMOTED VIDEO
Life and Style
gaming

I Am Bread could actually a challenging and nuanced title

Sport
Mario Balotelli pictured in the win over QPR
footballInternet reacts to miss shocker for Liverpool striker
Voices
Sol Campbell near his home in Chelsea
voices
News
i100
News
Kimi the fox cub
newsBurberry under fire from animal rights group - and their star, Kimi
Sport
Fans of Palmeiras looks dejected during the match between Palmeiras and Santos
footballPalmeiras fan killed trying to 'ambush' bus full of opposition supporters
Finacial products from our partners
Property search
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating
and  

By clicking 'Search' you
are agreeing to our
Terms of Use.

ES Rentals

    iJobs Job Widget
    iJobs Money & Business

    Customer Service Executive / Inbound Customer Service Agent

    £18 - 23k + Benefits: Guru Careers: We are seeking a Customer Service Executiv...

    ASP.NET Web Developer / .NET Developer

    £60 - 65k + Benefits: Guru Careers: We are seeking a ASP.NET Web Developer / ....

    Operational Risk Manager - Asset Management

    £60,000 - £80,000: Saxton Leigh: Our client is an leading Asset Manager based...

    Project Coordinator - 12 month contract

    £27000 - £32000 Per Annum: Clearwater People Solutions Ltd: Our large charity ...

    Day In a Page

    Oscar Pistorius sentencing: The athlete's wealth and notoriety have provoked a long overdue debate on South African prisons

    'They poured water on, then electrified me...'

    If Oscar Pistorius is sent to jail, his experience will not be that of other inmates
    James Wharton: The former Guard now fighting discrimination against gay soldiers

    The former Guard now fighting discrimination against gay soldiers

    Life after the Army has brought new battles for the LGBT activist James Wharton
    Ebola in the US: Panic over the virus threatens to infect President Obama's midterms

    Panic over Ebola threatens to infect the midterms

    Just one person has died, yet November's elections may be affected by what Republicans call 'Obama's Katrina', says Rupert Cornwell
    Premier League coaches join the RSC to swap the tricks of their trades

    Darling, you were fabulous! But offside...

    Premier League coaches are joining the RSC to learn acting skills, and in turn they will teach its actors to play football. Nick Clark finds out why
    How to dress with authority: Kirsty Wark and Camila Batmanghelidjh discuss the changing role of fashion in women's workwear

    How to dress with authority

    Kirsty Wark and Camila Batmanghelidjh discuss the changing role of fashion in women's workwear
    New book on Joy Division's Ian Curtis sheds new light on the life of the late singer

    New book on Ian Curtis sheds fresh light on the life of the late singer

    'Joy Division were making art... Ian was for real' says author Jon Savage
    Sean Harris: A rare interview with British acting's secret weapon

    Sean Harris: A rare interview with British acting's secret weapon

    The Bafta-winner talks Hollywood, being branded a psycho, and how Barbra Streisand is his true inspiration
    Tim Minchin, interview: The musician, comedian and world's favourite ginger is on scorching form

    Tim Minchin interview

    For a no-holds-barred comedian who is scathing about woolly thinking and oppressive religiosity, he is surprisingly gentle in person
    Boris Johnson's boozing won't win the puritan vote

    Boris's boozing won't win the puritan vote

    Many of us Brits still disapprove of conspicuous consumption – it's the way we were raised, says DJ Taylor
    Ash frontman Tim Wheeler reveals how he came to terms with his father's dementia

    Tim Wheeler: Alzheimer's, memories and my dad

    Wheeler's dad suffered from Alzheimer's for three years. When he died, there was only one way the Ash frontman knew how to respond: with a heartfelt solo album
    Hugh Bonneville & Peter James: 'Peter loves his classic cars; I've always pootled along fine with a Mini Metro. I think I lack his panache'

    How We Met: Hugh Bonneville & Peter James

    'Peter loves his classic cars; I've always pootled along fine with a Mini Metro. I think I lack his panache'
    Bill Granger recipes: Our chef's heavenly crab dishes don't need hours of preparation

    Bill Granger's heavenly crab recipes

    Scared off by the strain of shelling a crab? Let a fishmonger do the hard work so you can focus on getting the flavours right
    Radamel Falcao: How faith and love drive the Colombian to glory

    Radamel Falcao: How faith and love drive the Colombian to glory

    After a remarkable conversion from reckless defender to prolific striker, Monaco's ace says he wants to make his loan deal at Old Trafford permanent
    Terry Venables: Premier League managers must not be allowed to dictate who plays and who does not play for England

    Terry Venables column

    Premier League managers must not be allowed to dictate who plays and who does not play for England
    The Inside Word: Brendan Rodgers looks to the future while Roy Hodgson is ghost of seasons past

    Michael Calvin's Inside Word

    Brendan Rodgers looks to the future while Roy Hodgson is ghost of seasons past