Fimbra warns of high-income risk

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INVESTMENT regulators are mounting a concerted effort to warn investors of the risks of funds that pay high income at the cost of endangering the security of their capital, writes Paul Durman.

Fimbra yesterday issued guidance to the financial advisers it regulates to tell them that it is important for investors to realise the difference between a payment from capital, and dividend or interest payments.

'If a rate of 'income' is offered that is much higher than can be obtained by dividend or deposit, it will normally be the case that the higher return is obtained at some risk to capital or at the expense of capital growth,' Fimbra said.

Similar warnings are being issued by Lautro, the life insurance regulator, the Investment Management Regulatory Organisation and the Securities and Investments Board, the senior City watchdog.

Concern arises from the popularity of high-income funds since deposit rates fell to their present lows. Foreign & Colonial's Higher Income Plan, which pays 10 per cent from investing in a mixture of shares, cash and options, has taken pounds 455m since its February launch.

But Save & Prosper has just abandoned its plans for a high-income fund because of its concern about capital erosion.