The mutual advantage

Short-Term savers seeking high returns have limited investment opportunities. Accepted wisdom says that investing in shares is the best way to get long-term growth. But long-term in this sense means a minimum of five years. Invest for a shorter period and you may discover that the risk outweighs the potential reward.

"Stock markets are inherently volatile," says Alan Pearson, an independent financial adviser at ASP Financial Services, a member of the Financial Options network of IFAs. "Equity-backed investments should be viewed for a minimum of five years as historically this would cover any correction in a market."

Equity investment includes all the various forms of pooled investment products such as unit and investment trusts, as well as buying shares directly. However, the more indirect the investment, the greater the dilution of the risk. For example buying 5,000 Marks & Spencer shares may seem to be a good buy if the shares rise in value. But if they fall, maybe because the stores temporarily lose their appeal, then your whole savings pot would be affected.

The risk can be slightly spread by buying two shares, perhaps M&S and BT, so that if one falls, the overall value of your investment is helped by the other's rise. Buying more shares further reduces the risk until eventually you reach the concept of pooled investments such as unit trusts or investment trusts. But even then, investing for just two or three years is too risky and costly, says Mr Pearson. "Pooled funds attract buying costs of around 5 per cent. There has to be adequate time to recover this initial charge as well as to overcome the volatility of these type of investments."

This theory also rules out most personal equity plans as they are in effect simply a wrapper to shelter equity investments from tax demands. What potential short-term investors are left with are the less exciting range of savings products found in the high street. Simon Holt, the managing director of Skipton Financial Services, the independent financial advice arm of the Skipton Building Society, says: "If accessibility to the money is important and the likely savings period is around two years, I would look no further than a building society savings account. A mutual organisation with no shareholder demands to satisfy is likely to have the edge on interest rates compared to their now demutualised competitors and the banks. Also, although certainly not a good reason in isolation, should the chosen society itself demutualise, there is the possibility of a windfall."

A walk down the High Street will reveal a wide range of savings products. If investors can afford to lock their cash away for a certain period, they are likely to find higher rates. But some instant access accounts also look good value, particularly as rates are rising. For instance, Sainsbury's Bank has just increased its Instant Access account rate to 6.5 per cent gross. The account accepts balances from pounds 1, unlike the many building societies. Scared of attracting carpetbaggers who open accounts simply to get potential windfall bonuses, many societies now require minimum investments of as much as pounds 5,000. For sums of that size, savers may be best advised to check on the growing number of postal and telephone accounts.

Beyond the simple savings accounts, there are a range of fixed-rate products. Institutions such as Bristol & West, Coventry building society, Newcastle building society, Norwich & Peterborough building society and the Woolwich all offer fixed rate bonds paying gross returns in the region of 7 per cent for set periods. But the danger with these products is that, in a time of rising interest rates, you end up fixing at too low a rate. On the other hand at least you know how much you will get.