Generating an income from savings held in deposit accounts can be difficult, with even the highest interest paying savings accounts struggling to keep pace with the rising cost of living.
Despite the Bank of England raising the base rate from 0.25% to 0.5% In December, inflation is currently running at 2.7%, the highest rate for nearly six years. The higher inflation goes, the less your cash is ultimately worth.
Higher potential rewards mean higher potential risks - you can lose money and you might not get a higher return - so if you’re an income-starved saver who is looking at becoming an investor, you must be prepared for the ups and downs that come with the territory. If you are unsure whether investing is right for you, seek professional financial advice.
Here we look at some potentially income-boosting investments. Always remember to ensure you have a suitably diversified portfolio. You should never just rely on one asset class or investment, as if this investment suddenly falls in value, you stand to lose more than if you had put your money into a range of different investments.
If the backdrop of low cash returns is not cutting it for you and you’re happy to take on some risk of loss, you could consider investing in a bond fund. Individual bonds, also known as fixed interest securities, are fixed term IOUs issued by companies and governments looking to raise money. In exchange for handing over your cash, a bond issuer will pay you interest for the life of the investment. If you buy a bond when it is first issued, when it matures you should get your money back in full, but your investment is not guaranteed, and you may get back less than you invest.
Bond funds come in a variety of guises. Some funds will invest solely, for example, in a basket of government bonds, while others will focus purely on those issued by corporations and some will invest in a mixture of the two. The primary appeal of bonds is they usually provide a regular cash-beating income stream through their interest payments. As with all investments the rule of thumb is that the higher the potential return on offer, the riskier the investment.
The chief risk is that if a bond issuer gets into financial trouble, it could end up failing to meet its interest payments or even repay your capital. Bonds issued by the governments of countries with strong economies are generally viewed as a safer than those issues by companies because they are considered less likely to default. But equally, there have been occasions when some nations have been unable to meet repayments. In addition, the prices of bonds, and therefore bond funds alter all the time, meaning the yield on offer will change and when you sell your investment you may get back less than you originally put in.
Find out more about bonds and gilts
The Jupiter Strategic Bond Fund, for example, invests across the entire fixed income market, including government and corporate bonds. Another example is the Fidelity Strategic Bond fund.
Please bear in mind that our mentioning this, or any other fund or investment, does not constitute a recommendation, and if you’re unsure where to invest, you should seek professional advice.
Equity income funds
Traditionally investing in shares is generally considered to be higher-risk than investing in bonds as they are usually far more volatile. As such, opting for a fund which will invest across a wide spread of stocks is generally recommended over just buying a handful of individual shares.
Equity income funds, which typically aim to deliver a steady, if not rising, income as well as capital growth tend to be perennially popular with yield-hungry investors. These portfolios invest in the shares of dividend-paying firms, in other words companies that share their profits, with their shareholders. Bear in mind that dividend payments are not guaranteed and companies can cut or cancel their payout altogether if they find themselves in financial trouble.
There is no shortage of UK focused equity income funds on offer while other portfolios have a global remit and some even have an emerging markets focus. When you invest in an equity income fund you can choose to either take the income or instead re-invest it instead - and if you don’t need the income, the latter route can be a good way to potentially boost your returns over the long term.
Investors can take a diversified approach by opting for a global equity income fund, such as the Henderson Global Equity Income Fund. For a UK-based fund, one example is the JO Hambro UK Equity Income Fund.
Bear in mind though that shares can be very volatile and you may get back less than you invest.
When you invest in a property fund, it can not only help you to diversify away from shares and bonds but it gives you the opportunity to spread your cash across a wide range of buildings, which often include the likes of retail parks, city office blocks and industrial estates.
Property funds, which invest directly in bricks and mortar, as opposed to those that invest in the shares of property firms, have a bond-like quality in that the rents paid by tenants, which are often pegged to the rate of inflation, can provide a stable and often rising income. In addition, you can also potentially enjoy the benefits of capital growth.
But just like other investments, property fund values can rise and fall and you may not get back what you originally invested. Property is also a highly illiquid asset, which means it cannot be sold quickly. As such, if a large number of investors try to get their money out, fund managers can impose ‘lock-in’ periods, which means you may have to wait until the firm sells some of its assets before you can get your hands on your cash.
Find out more about an introduction to funds
Bear in mind that ideally, property funds would form part of a balanced portfolio, alongside other types of assets, such as shares, bonds and cash. Funds in the commercial property sector include the M&G Property Portfolio and L&G UK Property Trust.
Our mentioning of any fund does not constitute a personal recommendation. If you’re unsure where to invest, seek professional financial advice. With all investments you may get back less than you invest, and your investment may fall as well as rise.