Understanding Investment Bonds

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Investment bonds are designed to produce medium- to long-term capital growth, but can also be used to give you an income.

You pay a lump sum to a life assurance company and this is invested for you until you cash it in or die. Investment bonds are not designed to run for a specific length of time but they should be thought of as medium- to long-term investments, and youll often need to tie up your money for at least five years. There will usually be a charge if you cash in the bond during the first few years. The bond includes a small amount of life assurance and, on death, will pay out slightly more than the value of the fund. For most investment bonds, you take the risk of losing some money for the chance of making more than you could get from putting money in a savings account. Some investment bonds offer a guarantee that you wont get back less than your original investment, but this will cost you more in charges.

You can usually choose from a range of funds which can invest in, for example overseas shares, fixed interest securities, property and cash. They can also offer a way of investing in funds managed by other companies, but this may lead to higher charges.

Investment risk can never be eliminated but it is possible to reduce the ups and downs of the stock market by choosing a range of funds to help you avoid putting all your eggs in one basket. This is known as Diversification. Different investment funds behave in different ways and are subject to different risks. Putting your money in a range of different investment funds can help reduce the loss, should one or more of them fall.

Think carefully about how you want to invest your money and consider taking professional advice.

The main types of charges on investment bonds include the following:

Allocation rates the proportion of your money used to buy units in the chosen funds. This may be more or less than 100%. For example, an allocation rate of 99% is, in effect, a 1% charge on your investment. If the allocation rate is more than 100%, this does not mean you get free money because other charges will offset it. Over time, the way companies take their charges may have a different impact on your investment.

Initial charges you may also pay an initial charge which is shown as a percentage by which your investment is reduced.

Annual charges each year you will pay annual charges to cover ongoing costs (such as the costs of fund management and administration). The amount you pay will vary from one bond to another (and may depend on the funds you hold within the bond).

Cash-in charges when you decide to withdraw some, or all, of your money, you may be charged to do so (particularly if you withdraw money in the early years).

Vincent C. Ragland is owner of PLANS. Mr. Ragland can be reached at (312) 286-6886 and by Email at vncnt599@sbcglobal.net.

The above information should not be construed as financial advice and you shouldn't make any investment decision based solely on what you read here. It's your money and your responsibility to invest as you see fit. For personal financial advice, please consult your financial professional.

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