Sadly, not all companies perform the same way. Investing in them can be a risky business. Nor is it always possible to get in on the ground floor - Pet Plan was privately owned.
Nevertheless, equity investment can be profitable. Over the past 10 years, the FT-SE 100 share index has significantly outperformed the amount paid by building society savings accounts. There is, of course, a trade-off. Your investment may go down. The ideal for cautious investors is to harness the powerful opportunity for growth and/or income from the stock market, while minimising its risks.
By investing in a range of shares unit and investment trusts investors can try to do that. The theory is that if there are one or two rotten apples in the trust, the rest should pull the average up and you should not lose out.
One of the most attractive aspects of unit and investment trusts is that many can be put into a personal equity plan (PEP). These provide shelter from income and capital gains tax for up to pounds 6,000 a person, a year. PEPs are easy to buy into, either in lump sums or in savings schemes, with payments starting from pounds 25 per month. This offers the benefit of gradually drip-feeding into the trust, so that if the value of the investment falls, the amount you can buy with your money grows proportionately. Similarly, if the investment rises, so does the amount you have saved.
For many, however, the choice between lump sum investments or regular savings is less important than choosing between funds. There are almost 2,000 different unit and investment trusts, ranging from relatively stable cash unit trusts to highly volatile emerging markets. Which sector to choose depends on your objectives, and how much risk you can accept. A general rule of thumb is to decide how long the investment period is likely to be. The longer it is the easier it is to have a portion of your money in a riskier sector.
Even with unit and investment trusts there is still a need to diversify the portfolio between different sectors, and sometimes different funds within them.
Another question is whether to go for growth or income. Generally, if you are relatively young and saving for a point far into the future - to pay off the mortgage or help your child through university - growth is more important. Older people approaching or in retirement may prefer an income fund with fewer risks. Some funds offer a mix of capital growth and income. Tracker funds also offer a mixture reflecting the index, usually the FT-SE 100, as a whole.
Choosing the right fund involves a series of different calculations. Performance is a key area. Always check how a fund has performed within its sector, not just in the past 12 months but over three, five, seven and 10 years. Generally, if a fund is in the top quarter, or even the top half, of its sector over each of those periods, it is well-managed.
Another area to compare is that of charges. The less the initial charge and subsequent annual management fees, the more you get to keep at the end of the investment period. The difference can be substantial.
A further point to consider is that of fund volatility. If performance swings wildly from year to year, the fund manager may be taking unacceptable risks with your money.
Several specialist investment magazines, including Money Management, Planned Savings and What Investment, all available through newsagents, provide details on charges, performance over long investment periods and on volatility.
Finally, investing is not always easy. If you have any doubt, consult an expert independent financial adviser (IFA). You may pay more in fees or commission, but the advice could prove invaluable in five or 10 years' time.
q For details of an IFA near you, call 0117 971 1177.Reuse content