Your Money: High returns carry risks

INVESTORS looking for income have been feeling understandably desperate recently, as returns from building society accounts remain stubbornly low.

The danger is investors will start piling into schemes that pay what looks like a high income, when in fact part of the monthly returns are made up of capital.

Save & Prosper's High Income Bond pays out 8.5 per cent a year for five years. The full amount invested is only returned if the FT-SE 100 rises by at least 30 per cent over the five years - an annual rise of 5.38 per cent.

If the market rose by 25 per cent or an annual average of 4.56 per cent, investors would get only 92.9 per cent of their cash back.

Stung by criticism that investors did not realise that income might turn out to be at the expense of capital, S&P sent a questionnaire to more than 1,000 investors asking if they had understood that their capital was at risk. More than three quarters returned the form, and 91 per cent of them said that they had understood.

But what about the 24 per cent who did not return the form? They are probably the ones who do not bother to read beyond the headlines, and they may be shocked to find that they cannot count on getting a higher than natural return without risking their capital.

It all comes down to risk/reward ratios. To put it another way, if you are getting a lot more than those around you, you had better know how and why and whether it is worth it.

The basis of many of the seemingly impossible offers around at the moment is the futures and options market. This is the bear-garden with young men and women in brightly coloured company jackets who stand in pits and yell at each other. It features on News at Ten when there is a financial crisis.

Mostly, they are dealing in the right to buy or sell single shares, an index of shares or currencies at a future date at a particular price.

You can see that the right to buy at below the market price would be worth quite a bit, while the right to buy at above the going rate would be worthless. This gives an exaggerated ride on the markets. As long as you are not writing the options, the worst you can do is to lose all your investment.

So a package is put together with the bulk in a solid investment, such as a zero coupon bond, to return the whole of the original capital, while the rest rides the waves with the hope of big gains and the comfort of at least not losing the original stake.

You need to watch the terms, but once you can see how it is done, you can at least believe that it works.

THE FOLK of Borsetshire need not panic about their car insurance.

The rural counties such as Lincolnshire, Gloucestershire, Cambridgeshire and Derbyshire are experiencing huge increases in theft and break-ins. But insurance premiums are unlikely to be pushed up to city levels. First, the crime levels are still below those of city centres, and second, theft only accounts for about 15 per cent of car insurance claims.

Thieves looking for easy pickings are moving out to areas where people don't bother to lock their cars.

All motorists can expect to see compulsory excesses to cover break-ins, to encourage them to take care of their cars and discourage them from claiming for small assaults on their vehicles.

ONCE homes that keep the gas fires burning are free from the British Gas monopoly, there will be yet another decision for householders to make.

Already there is the option to take on Mercury rather than stick with BT for phone calls. This saves money for people making a large number of long-distance and international calls.

You can also choose how to pay for your water - either through the old water rates system based on rateable values or by installing a meter. This will be cheaper for larger homes, especially if they don't take too many baths or sprinkle the lawn.