Don’t put all your nest-eggs in one basket – you should keep on investing

Why should you invest? It is a question that is rarely asked because the answer is usually so obvious and convincing. Investing is generally one of the most lucrative and reliable ways to generate an income from a nest egg. A balanced portfolio of stocks and bonds should provide a nice stream of dividend and interest payments.

Investors can enjoy these payments as income or add them to their nest egg to further grow their wealth. It is a strategy that is not without risk, but that usually pays off in the long run.

In recent weeks, however, more and more investors are doubting the value of investing over saving for the first time. The interest you can get on the best savings accounts is now at least as generous as the income you could hope for from investing. Some savings accounts offer five or six percent. Interest payments are guaranteed and balances up to £85,000 are fully protected as long as your savings provider is covered by the Financial Services Compensation Scheme (FSCS).

In comparison, few income funds offer an income as high as five or six percent. And while you can reduce risk by investing your money in different funds, there is no guarantee against certain losses. “For those with a prudent risk appetite, cash has become a viable alternative to fund investing for the first time in 15 years,” said Tom Parry, financial planner at asset manager Old Mill.

So, should investors hold a larger portion of their assets in cash while rates are elevated? And what does investing offer that a regular savings account does not offer? Wealth & Personal Finance investigates.

The business of investing

Income funds are a proven way to get a stable return from a lump sum. The way they work is very simple. Investors hand their money over to a fund manager, who looks for companies that he or she believes are likely to pay a steady stream of dividends to shareholders.

Alternatively, investors can opt for a passive fund, which picks companies that use computers instead of human skills.

Fund managers seldom choose the companies that have paid the best dividends in the past. There is no guarantee that they will continue to pay a good income. The skill is in identifying the companies that will pay a reliable—preferably growing—income in the future.

Some income funds also buy corporate and government debt in the form of bonds and gilts to generate stable returns.

James Yardley, senior research analyst at fund research group FundCalibre, is a fan of the City of London Investment Trust, which has a return of five percent, and Schroder Income, which has a return of 5.14 percent. Both generate income by investing in regular dividend paying UK companies such as Shell, HSBC, Tesco (in the case of City Investment Trust) and Marks & Spencer (invested in by Schroder Income).

While neither generate income that’s currently better than the very best savings accounts, they — and a host of other income funds — have another advantage.

The City of London Investment Trust has increased its dividend every year since 1966. In fact, there are 19 investment companies like this that have increased their dividends for at least 20 consecutive years. There’s no guarantee they’ll continue to do so, but they certainly have a reliable track record.

In comparison, savings accounts are having their day in the sun, but there is no certainty that rates will rise further, nor that savings providers will pass on further rate increases to their customers.

Zoe Gillespie, an investment expert at asset manager RBC Brewin Dolphin, says long-term investing is often a good way to beat inflation, while savings are not. However, there will be occasions – such as now – when this is not the case. “The old adage of real companies, owning real assets, paying real dividends out of real profits rings true,” she says. “Our research shows that this does not always coincide with periods of high inflation, historically it is usually afterwards.”

Carl Stick, manager of the Rathbone Income Fund, adds that investing in a portfolio of outstanding companies can be a great way to generate growing income in any economic environment. “The very best companies, with the best track record of capital investment and cash management, are able to pay out a growing revenue stream each year, regardless of market cycles,” he says.

“If we can invest in a portfolio of these outstanding companies, we can provide our participants each year with what we call a ‘wage increase’, which is so crucial in an inflationary environment.”

Job Curtis, manager of the City of London Investment Trust, adds that while banks simply pay interest, equity funds like his offer the opportunity for both growth and income. That’s because such funds not only provide income in the form of dividends, but also aim to grow your wealth through rising stock prices. “Equity funds offer income growth prospects as corporate earnings and dividends rise,” he says. “This is especially important in an era of inflation.”

Finding opportunities

Not everyone is convinced of the benefits of staying invested while interest rates are rising.

Investors even withdrew £1.2bn from funds investing in UK companies in May, according to the Investment Association. Funds investing in European, Japanese and US companies also saw massive outflows of UK investors.

However, Yardley, of FundCaliber, argues that investors fleeing cash means there is opportunity for the brave.

“As a result of these high cash rates, investors are dumping lots of other assets to buy them, which presents great opportunities for those with a long-term mindset,” he says. “We see tremendous value.”

Yardley says he sees particular value in some British companies. “Small and medium-sized businesses in the UK look cheap because they’ve been heavily sold,” he says.

In addition to the funds mentioned above, he likes Man GLG Income, which has a yield of 5.43 percent, and Marlborough Multi Cap Income, which has a yield of 5.23 percent.

Income funds that invest in government and corporate debt may be another good option. The benefit of investing in debt – also known as fixed income – rather than stocks is that it provides more consistent income. The UK’s two-year government debt, known as gilts, is currently yielding 5.3 percent.

The case for savings

While big banks are frowned upon for not passing high interest rates on to depositors, a quiet revolution is underway at the top of the best-buy charts for savings accounts. Here, lesser-known challenger banks vie for the top spot for both instant savings and longer-term fixed-income bonds.

James Daley of Fairer Finance, a product rating company, says: “With easy access accounts now paying over four percent and fixed rate accounts over six percent, saving is an incredibly attractive option for the first time in more than 15 years. option.

“Combined with the fact that the outlook for many Western economies is quite modest over the next few years, it makes sense to put a larger portion of your long-term savings into cash than into stocks and bonds.”

The highest cash rates, over six percent, are currently available to those who put their money into a one-year bond at Al Rayan Bank through the Raisin savings platform and pay 6.01 percent, or a First Save two-year bond at 6.15 percent . cent.

As a benchmark, the financial regulator Financial Conduct Authority expects investments with an average return to yield about five percent per year. All types of savings accounts, except easily accessible ones, now beat this.

Keep taxes low

Both savers and investors with significant nest eggs are at risk of a tax bill. However, you are usually better off generating the same return through investments than by saving money.

Suppose you had £20,000 and earned an annual income of six per cent. If you received the income as savings interest you would be faced with a £40 tax bill, or £280 if you are a higher taxpayer. If you earned it as investment income you would have a tax bill of £17.50 or £67.50 if you are a higher taxpayer.

However, you can deposit up to £20,000 into an Isa each tax year without paying any income tax, whether your money is invested or in a savings account.

But be careful…

If you switch between saving and investing, do so safely. Your savings are only protected up to £85,000 per institution, so be careful if you’re moving large amounts.

And if you’re moving money between cash and stock and Isas stock, make sure you’re following the proper processes so your money doesn’t lose its tax-exempt status. Ask your Isa providers to perform the transfer, rather than doing it yourself.

If you’re investing for income, keep in mind that – unlike with savings accounts – simply aiming for the highest returns can be a risky approach. Sometimes higher risk companies and funds offer investors high incomes to encourage them to invest.

Finally, don’t forget the surcharges. Depositors rarely have to pay for the privilege of opening an account, but investors must pay their investment platform and ongoing fees to the fund they entrust their money to.