Although the idea of investing to provide for your future financial security is gaining wider acceptance, for the would-be investor, finding the most appropriate investment can be a daunting prospect.

Consulting an Independent Financial Adviser (IFA) will be an obvious first step for many, particularly those who are looking at the various types of collective investment vehicles available rather than planning to invest directly in shares.

Most of us now recognise the need for some kind of retirement funding, but there is an increasing emphasis on the need for the individual to take out some kind of private provision across a broad range of areas, from healthcare to education.

But while retirement funding is obviously a basic need, a pension plan need not be the only route to providing fo r your future.

As well as savings vehicles designed for specific purposes – such as school fees provision – there is also a whole range of opportunities open to the investor wishing to generate extra income or build up a capital sum for the future. Additionally, the investor can address the need to provide for dependants in the event of an unexpected loss of earnings.

All the forms of investment open to UK investors can, broadly speaking, be split into two main categories – direct investments, such as stocks & shares, or collective investment schemes.

For the majority of UK investors, direct investments generally mean shares or bonds or gilts. Although the spread of share ownership has widened considerably in Britain since the early 1980s, and with it public awareness of what share ownership means, it is worth reiterating the basic principles.

The trade in stocks and shares, facilitated by market makers whose role is to quote both a buying and selling price for listed stocks and shares, is known collectively as the stock market.

The second principle form of direct investment is bonds and gilts. Bonds are basically chunks of debt. In buying a bond, the investor is effectively lending money to the bond’s issuer. The investor knows in advance what sort of return they will get on their investment and bonds are generally regarded as a much lower risk category of investment than shares.

Gilts are bonds issued by the UK government – the name derives from the term “gilt-edged stock” – so by buying gilts the investor is lending money to the UK government. As the UK is regarded as a safe bet to honour its commitment to buyers of its government stock, gilts are in turn regarded as one of the safest forms of investment. The issuer – in this case the government – is guaranteeing to repay your capital at the end of the bond’s term, (if there is a redemption date) and you also get a guaranteed coupon return throughout its life.

But it is not just governments who issue bonds. Corporate bonds work in a way that is broadly similar to government bonds – they are issued by companies as a way of raising money from investors. Again, they pay a coupon rate coupled to a pledge to repay the capital at the maturity date. Like gilts, they can be traded on the market if investors want their capital back before the maturity date.

However, companies can default on corporate bonds, so return of capital is not guaranteed. Corporate bonds are therefore risk-graded, with higher risk bonds paying a higher coupon to attract buyers.

In the UK there are three principal types of mainstream collective or pooled investment schemes – Unit Trust, Investment Trust and Open Ended Investment Company (OEIC).

All three will take the pooled monies of a large number of investors and put them in the hands of a professional fund manager. He or she will choose a broad spread of instruments in which to invest, depending on their investment remit. The main asset classes available to invest in are shares, bonds, gilts, property and other specialist areas such as hedge funds or ‘guaranteed funds’.

An investor in a unit trust ‘buys’ a number of units, while an investor in an investment trust or OEIC ‘buys’ shares. Unit trusts are open-ended, which means that units can be issued as demand requires. The price of these units is dependent on the value of the underlying assets, and they can be sold back to the fund managers by the investor. Most UK collective investment schemes are authorised by the Financial Services Authority (FSA).

The OEIC is structured along similar lines to the unit trust, but it differs as it has no bid/offer spread. This means buyers and sellers get the same single price. Additionally, the OEIC has an “umbrella” structure allowing numerous sub-funds investing in different types of assets, so the investor can switch easily between different investment funds.

Given the range of options of unit trusts, investment trusts or OEICs, the choice can be confusing – consulting an Independent Financial Adviser could help simplify your investment choice.

An index tracker fund tracks a stock market index. Having decided which recognised market index is most appropriate for the tracker fund, the manager (often a computer rather than a person) will invest in such a way as to replicate the make-up of that index. In times of good stock market performance tracker funds are attractive.

Active managers argue that their skills allow them to produce better returns than the market average, and hence the index, as well as to avoid the worst of any market falls by switching away from the worst affected shares.

There are hundreds of collective investment schemes to choose from. The services of Thomas Anthony Wealth Management Ltd can greatly simplify the investment process.

So why should the saver, who has been content to build up a nest egg in a deposit account, move into the riskier area of investment in equity or bond markets? Well, the main reason is the chance of a higher return than can be obtained from deposit accounts. If the investor is prepared to be patient, mainly types of investment are not for the short term; over time he or she should be able to expect a higher return.

The investor must also consider the question of risk. In a low interest rate environment the return on your deposit account may decrease, but there is no threat to your capital. Investing in shares is different. Potential returns can be much greater than those offered by cash deposits. But if the shares in which you have invested were to fall in price, there is a real threat to your capital itself.

We can help establish what level of risk you should take with your investments.

If you are looking to invest directly in shares or bonds or collective investment schemes, a tax-efficient method of doing so is through an Individual Savings Account (ISA).

An ISA is not an investment in itself – it is a tax-efficient “wrapper” which you may use to hold a range of investments.

As the UK ’s principal tax-efficient investment plan, an ISA can incorporate a stocks and shares element within which you can invest up to £7,000 for the current tax year. Alternatively, you can set-up three mini ISAs, the components being cash, stocks & shares and life assurance. The investment limits for mini ISAs are lower.

Within the stocks and shares element of an ISA you may invest directly in shares or bonds or collective investment funds.

It makes sense to take advantage of all the existing tax allowances and we will be able to help you do this.

Whatever the nature of the investments you are considering, the starting points should be the same. At Thomas Anthony, we will be able to help you identify the type of vehicle best suited to your needs, based on your own preferred balance between risk and return.

Most obvious among the questions you should ask is “How much will it cost?” All collective investment schemes have built-in charges, but these vary. For the investor, these charges can be difficult to understand so it is important that this is explained properly.

Another key factor is how long you intend to invest. Make sure that your wishes are clearly stated when it comes to short, medium and long-term investments. Lastly, make sure you understand all the risks of your chosen investment.

For further information please contact us for an appointment or preliminary discussion.

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