Investment vehicles that go the distance

Income versus growth: here we look at where to put your cash for short and long-term gains
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The Independent Online

Before making any investment, decide what you hope to get out of it. Rather than opt for a fund because the manager claims 80 per cent returns over three years, it is vital to establish your investment profile.

Before making any investment, decide what you hope to get out of it. Rather than opt for a fund because the manager claims 80 per cent returns over three years, it is vital to establish your investment profile.

The key factors are whether you want a regular income or a lump sum in the future, your attitude to risk and how much money you have to invest. Your views will be dictated by whether you want to invest for income or growth. Income is more important for older investors: the most popular type of income-producing investment is the pension, one of the most tax-efficient savings around. The aim is to put enough money away in a high-performing fund to provide a decent income when you retire.

But these can be inflexible products that you cannot get your hands on until a certain age, and even then, you must purchase an annuity. So if you are nearing retirement age and are keen to top up your pension, it may be worth considering more flexible, income-producing investments too.

Look further than savings accounts as most offer paltry interest. Keep something in a savings account for a rainy day but choose the highest interest rate. Northern Rock offers 6.75 per cent on sums over £250. If you have internet access, First-e offers 6.56 per cent.

For higher yields, you must invest in the stock market. High-income equity individual savings accounts (ISAs) are a tax-efficient way to invest as well as offering the potential of high returns. For those who want to restrict their exposure to the stock market, there are corporate bond funds, with-profits bonds and income-producing investment trusts.

Legal & General Fixed Interest or M&G Corporate Bond funds are suitable if you want mainstream, limited-risk investments. If you are prepared to take on some extra risk, Fidelity Extra Income, Henderson Preference & Bond, M&G High Yield Corporate Bond or the Newton International Bond are worth considering.

Even if you are investing for income, you should not forget the underlying value of your capital. There should be some potential for growth there too or the effects of inflation will diminish the investment's value.

Who should invest for growth? Younger investors, in particular, may not need an income from their investments if they have cash left over each month after paying the bills and the mortgage. And anyone who wants to build up a lump sum needs an investment vehicle that lets cash grow.

Investing for growth tends to be more risky than investing for income. But as you have a longer period of time, you can afford to take more risk.

The Barclays Equity Gilt study shows that returns are higher on the stock market than in bonds or cash. The difference is considerable: £100 invested in 1918 would be worth £7,425 today if it had been left in a savings account, £12,843 if invested in gilts or £1,238,614 in equities.

The first priority for growth should be to use up your tax-free allowance by putting £7,000 this year into a maxi ISA. Mini cash ISAs are a popular choice as charges and risk are low but they bring negligible returns in the long term.

The risk-averse should consider with-profit bonds as they smooth out returns, protecting investors from fluctuations. If you are looking to invest for 10 years or more you can afford to be more adventurous as the risk of volatility is reduced.

Technology stocks are worth considering. But rather than buying speculative dot com stocks, opt for a specialised fund like Henderson Global Technology, Aberdeen Technology or City Financial Technology Growth. Some technology stocks look over-valued so limit them to 15 per cent of your portfolio.

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