3. When it comes to investing your hard earned cash, there is a
huge variety of products and options available. In fact, so many
that it can be confusing. Yet once you know the basic principles
of investing, you’ll soon be able to make confident choices and
enjoy potentially higher returns than those offered by a bank or
building society account. All investments carry a degree of risk,
but some are more risky than others.
This guide from the Prudential aims to help you determine your attitude to risk,
get an overview of some of the types of investment that are available, and make
informed decisions about how, when and where to invest for the future. The more
adventurous you are, and the more prepared you are to take a calculated risk, the
greater your potential returns.
And if you have any questions, we’re always here to help.
3
4. UNDERSTANDING
INVESTMENTS
Page
1 Where, when and how long 6
to invest
2 Five categories of assets 9
YOUR WAY
AROUND THE GUIDE
Information in this handy guide is
based on our understanding of
current taxation, legislation and HM
Revenue & Customs practice, as at
May 2007, all of which are liable to
change without notice. The impact
of taxation (and tax relief) depends
on individual circumstances.
4
5. MAKING YOUR DECISION AND FINALLY
Page Page
3 Your attitude to risk 14 Technical terms explained 30
4 Balancing risk and reward 15
5 Collective investments 17
6 Tax efficient savings 22
7 Other types of investments 24
8 Questions to ask 25
TAKING ACTION
Page
9 What to do now 27
5
6. UNDERSTANDING INVESTMENTS 1 WHERE, WHEN AND HOW LONG TO INVEST
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6
7. 1 WHERE, WHEN AND HOW LONG TO INVEST
UNDERSTANDING INVESTMENTS
continued
WHERE TO INVEST WHEN TO INVEST
It’s the potential to make more of your money There’s no time like the present when it comes to
that’s one of the biggest reasons for investing. investing. You may feel you need a large sum to invest
And for this, the stock market, for instance, has almost if you are to build a future fortune. But however much
always been a more rewarding (though riskier) option or how little you have to invest it’s never too late
than putting cash in a bank or building society account. to start. If you’re worried about investing during a stock
market high or low, don’t worry. You can smooth the ups
Since 1962, shares have beaten cash... and downs by investing little and often.
in 96% of all 10-year periods* HOW LONG TO INVEST FOR
in 100% of all 15-year periods* Another key to growth is the length of time
in 100% of all 20-year periods* you invest over. Ideally, you need to think long term
– which means at least five years. w
*Source: M&G statistics as at 31 August 2006
PRUDENTIAL INVESTMENTS 0800 072 6159 www.pru.co.uk/save_invest 7
8. UNDERSTANDING INVESTMENTS 1 WHERE, WHEN AND HOW LONG TO INVEST continued
INVESTING FOR INCOME OR GROWTH INVESTING FOR INCOME AND GROWTH
There are two main ways of investing, for: It’s also possible to invest for both income and growth.
Investments that can help you achieve this include
1 INCOME
equity-based funds invested in both the UK and abroad.
Investing for income means that you use the interest
and dividends earned from your savings and
investment plans to boost your earnings or
pension income. These investments could include
PEPs, ISAs, savings accounts and bonds.
2 GROWTH
Investing for growth means that you plough your
interest or dividends straight back into your fund
so that it grows still further through the power of
compounding.
Compounding means you earn money on your
original investment plus on any dividends or interest
earned. So your capital can steadily increase,
attracting more potential growth all the time.
8
9. 2 FIVE CATEGORIES OF ASSETS
UNDERSTANDING INVESTMENTS
Bonds, dividends, ISAs – this guide from the Prudential 1 CASH
will explain them all and make your investment choices
clear. To make it simpler, there are five types of Basically, you deposit your cash into a bank or
assets you can invest your money in: building society and your money is invested for you
(often by being lent to someone else). In return you
1 CASH receive interest on your capital. This is seen as a
safe investment, but the returns are often low,
2 GILTS (GOVERNMENT BONDS) depending on the market rate.
3 CORPORATE BONDS
4 EQUITIES (STOCKS AND SHARES)
5 PROPERTY
PRUDENTIAL INVESTMENTS 0800 072 6159 www.pru.co.uk/save_invest 9
10. 2
UNDERSTANDING INVESTMENTS
FIVE CATEGORIES OF ASSETS continued
2 GILTS (GOVERNMENT BONDS) WHY ARE THEY CALLED GILTS?
With gilts, you loan your money to the UK Government bonds are known as ‘gilts’ because
Government. Your returns will be paid in the form the certificates were originally edged with gilt, which
of a regular income (known as the ‘coupon’). showed how golden the Government’s finances
At the end of the period the loan is repaid on the were considered to be.
‘redemption date’. Meanwhile, your money will have
gone towards funding road maintenance, schools,
etc. You can buy or sell gilts whenever you choose.
Gilts are the most secure type of bond you can
obtain because the Government has never failed to
pay its debts and is unlikely to go bankrupt. The
coupon is fixed and regular no matter which political
party is in Government at the time – the actual
amount will vary from issue to issue. Your total return
will depend on the price at which you buy and sell.
Gilts can be a good way to provide yourself
with an income.
10
11. 2
UNDERSTANDING INVESTMENTS
FIVE CATEGORIES OF ASSETS continued
3 CORPORATE BONDS
This is when you loan your money to a public
company in return for a fixed rate of interest. As
with gilts, you can buy and sell corporate bonds
whenever you want, so you’re not locked in for any
length of time.
When it comes to risk, corporate bonds have
a broad range. It all depends on the underlying
strength of the company you invest in. Lower risk
corporate bonds pose less risk to your capital, but may
mean lower returns on your investment too. Higher
risk bonds are just the reverse – they expose your
capital to more risk, but can mean a potentially higher
level of return on your investment.
On the whole, corporate bonds tend to offer
better returns than gilts, but are less secure as
the Government doesn’t underwrite them.
PRUDENTIAL INVESTMENTS 0800 072 6159 www.pru.co.uk/save_invest 11
12. 2
UNDERSTANDING INVESTMENTS
FIVE CATEGORIES OF ASSETS continued
4 EQUITIES (STOCKS AND SHARES)
Equities mean you buy a share or shares in a Once you own shares, you may also receive an
company and become a ‘part-owner’. The price of a income from them in the form of dividends. The
share that you buy (or sell) depends on a few factors: value of your dividends will depend primarily on how
how well the company is expected to perform in the well the company you’ve invested in is doing.
future, how many people want the shares; and how
Investing in individual shares can be risky. You
many shares are available (in a nutshell, ‘supply
should carefully research the management and market
and demand’).
potential of any company you are interested in. If you
Of course, a number of things can happen to shares go this way, make sure you have all the key facts to
once you’ve bought them since the stock market can hand before making a decision.
be up one day and down the next, or the performance
of the company could change. So the value of your
shares could rise or fall.
12
13. 2
UNDERSTANDING INVESTMENTS
FIVE CATEGORIES OF ASSETS continued
5 PROPERTY
Investing in commercial or residential property
can provide an income in the form of rent.
Buy-to-let properties are popular at the moment and
if you do your homework and buy a property in an
area where prices rise, you can eventually sell and
make a profit, too. But unless you find a buyer
immediately, it may take some time before you get
your hands on it. Likewise, if the value falls to less
than the original price you paid, and you have to sell,
you’d make a loss.
The downside is that you’re liable for tax on
some or all of the income received from your tenants,
and you could incur capital gains tax on any profit
when you sell. Also, if there’s a gap between tenants’
occupancies you’ll still have to cover the mortgage.
PRUDENTIAL INVESTMENTS 0800 072 6159 www.pru.co.uk/save_invest 13
14. 3 YOUR ATTITUDE TO RISK
MAKING YOUR DECISION
When you invest your capital there is always a As a guide, you should take the following into account:
degree of risk involved, whether it’s high or low.
Equities are considered high risk, for example, while your personal circumstances (your age, and
a deposit account is low risk. Generally, the higher the how much money you’re prepared to invest)
risk, the higher the potential increase in your capital
the length of time you want to keep your
(and the higher the potential loss). In fact, with some
money invested
investments you could risk losing not only the return
on your investment, but also your capital itself. how much access you need to your capital
So for reasonable returns, some risk may be necessary your attitude to risk (how much you’re
– meaning that the value of your capital could go down prepared to lose)
as well as up. Therefore you need to decide how much tax implications
money you are prepared to risk if you take this approach.
the effect of inflation in reducing the value
Only you can decide how much risk you’re
of your capital over time.
prepared to accept.
However, armed with some facts and figures, you may
be ready to take calculated investment risks and balance
them out with other, less risky investment strategies so
that your chances of higher overall gain remain good.
14
15. 4 BALANCING RISK AND REWARD
MAKING YOUR DECISION
Most experts suggest you aim for a ‘balanced’ HIGHER Direct HIGHER
portfolio. This means spreading your investments Investment
in Stockmarket
across a range of products to minimise your
exposure to risk. In turn, this means your individual Specialist
investments will have a different potential for growth Funds
(and of course, loss).
UK Equity
POTENTIAL REWARDS
Given some forward planning, you can decide on the Funds*
POTENTIAL RISKS
amount of risk with which you’re most comfortable.
Balanced Managed*,
Use the pyramid (right), to work out which products Distribution*and
are right for you, depending on your attitude to risk. Property Funds*
Please note that this risk assessment has been With-Profits Funds and
Cautious Managed Funds*
classified by Prudential and the ABI and is not a
generic description across the fund management
Gilts, Fixed Interest Deposits
sector. The investment approach may change in and Shorter Dated Bonds
the future.
Cash and Deposit Accounts /
Cash ISAs / Premium Bonds
LOWER LOWER
*As classified by the Association of British Insurers.
PRUDENTIAL INVESTMENTS 0800 072 6159 www.pru.co.uk/save_invest 15
16. 4
MAKING YOUR DECISION
BALANCING RISK AND REWARD continued
CHOOSE YOUR INVESTMENTS WISELY,
TO CONTROL YOUR EXPOSURE TO RISK
Some investments offer features that help reduce
risk. For example, a with-profits fund benefits from the
smoothing effect (described on page 18). And if you
invest in a guaranteed equity bond your capital will
usually be guaranteed, providing you keep your money
invested for the duration of the term. (You’ll need to
check the specifics with your provider.)
While most of us would like to say “no” to risk
completely, the nature of investments means there’s
always some level of risk involved. The trick is to
keep your balance.
16
17. 5 COLLECTIVE INVESTMENTS
MAKING YOUR DECISION
GO IT ALONE OR BECOME A COLLECTIVE
INVESTOR
As a private investor, you may not have the time or
expertise to create a diverse portfolio that helps to
spread your investment risk. So another choice you
need to make is whether you’re going to invest
on your own, or make ‘collective’ investments as When you make a collective investment, you invest in
part of a group. Most private investors tend to invest a fund. Think of a fund as a briefcase containing one
collectively – which means their investments are pooled or a mixture of items such as stocks and shares, equities,
with lots of people’s money and spread over a bonds, property or cash. You can even invest in funds
number of different investments. made up of other funds. In this instance, your fund-of-
Unit trusts and OEICs (Open-Ended Investment funds briefcase will contain smaller briefcases which in
Company), for instance, pool together lots of money turn contain similar sets of assets.
from thousands of small investors to spread their risk So as you can see, a fund can contain a great variety of
and give them the clout of a multi-millionaire. things. And it’s this variety, spread across different risk
levels, that often makes collective investments an
attractive option.
PRUDENTIAL INVESTMENTS 0800 072 6159 www.pru.co.uk/save_invest 17
18. 5
MAKING YOUR DECISION
COLLECTIVE INVESTMENTS continued
WITH-PROFITS BONDS UNIT TRUSTS
This is a bond that invests in a with-profits fund, Unit trusts are collective investments that allow
which in turn invests in a mixture of equities, you to invest indirectly in shares, both in the
bonds, property and even cash. With-profits UK and overseas, while benefiting from expert
bonds benefit from smoothing. Smoothing basically investment management.
means holding back some of the profits in years To help you select the right unit trust, first define
when returns are good, in order to help the fund your aims for it. Next, do your research. Some funds
maintain its payouts in leaner years. This reduces the will charge high management fees. If they do, make
impact of ups and downs in the underlying sure you get value for money. You should expect
investment performance, so it helps to give you a an actively managed fund (one where a team of
steadier return on your capital. analysts and portfolio managers aim to pick the best
performing funds) to beat the average stock market
A with-profits bond is unsuitable as a short-
performance, known as the market index.
term investment. The value of the bond depends
on how much profit the company makes and how Other unit trusts are known as trackers. This means
they decide to distribute it. they aim to mirror the performance of the index rather
than try to beat it. As a result, the gains (or losses)
might not be as spectacular as some actively
managed funds.
18
19. 5
MAKING YOUR DECISION
COLLECTIVE INVESTMENTS continued
OEIC (OPEN-ENDED INVESTMENT COMPANY)
A number of unit trusts have been converted
into OEICs. Basically the OEIC is an investment
company where shares are issued instead of
units. The principal difference is that OEICs have a
single price to which the initial charge for purchase
is added. FOR INFORMATION ON PRUDENTIAL’S...
With-Profits Bond call 0800 015 4621
or visit www.pru.co.uk/save_invest/
prufund_investment_plan/
Unit Trusts call 0800 072 6159
or visit www.pru.co.uk/save_invest/
prudential_unit_trusts/
PRUDENTIAL INVESTMENTS 0800 072 6159 www.pru.co.uk/save_invest 19
20. 5
MAKING YOUR DECISION
COLLECTIVE INVESTMENTS continued
MORE ABOUT FUNDS There are several types of funds available, including:
It’s important to know this about funds:
EQUITY FUNDS
■ The various assets that make up a fund can be
changed over time, or they can stay as they are. These are often unit trusts or OEICs. They are made
up primarily of stocks and shares.
■ Funds are generally looked after by a fund manager,
which means that when you invest in a fund, you are For information on investing in an Equity Fund with
also investing in the fund manager’s opinion, research Prudential, call 0800 072 6159
and expertise (as well as the strength of the company or visit www.pru.co.uk/save_invest /
he or she works for). prudential_unit_trusts /
■ You’ll also need to give some thought to what level
of risk a fund involves before you invest in it. CORPORATE BOND FUNDS
This is where you invest in a range of corporate bonds.
PROPERTY FUNDS
These invest in a portfolio of commercial and
residential properties.
20
21. 5
MAKING YOUR DECISION
COLLECTIVE INVESTMENTS continued
DISTRIBUTION FUNDS THE ART OF INVESTING
Distribution funds are specifically designed to When forming an opinion about investing in
produce a regular income over the longer term. stocks and shares or funds, there are a few
things that might help. You can read financial
You can receive an income when it suits you.
newspapers and magazines, eavesdrop on
Depending on the option you choose this could be
conversations between brokers, bankers,
monthly, every three, four or six months, even once
analysts and traders.
a year. The amount you need to invest varies
according to the scheme on offer, but you can start
And you could also consider a few words
from £5,000. You should be happy to invest for the
by Peter Lynch*, one of the world’s most
longer term – at least five years.
successful investors:
For information on Prudential’s Distribution Funds
“GO FOR A BUSINESS THAT ANY
visit www.pru.co.uk/save_invest/fip/
IDIOT CAN RUN. BECAUSE
SOONER OR LATER,
ANY IDIOT IS GOING TO RUN IT.”
*Source: www.woopidoo.com
PRUDENTIAL INVESTMENTS 0800 072 6159 www.pru.co.uk/save_invest 21
22. 6 TAX EFFICIENT SAVINGS
MAKING YOUR DECISION
INDIVIDUAL SAVINGS ACCOUNTS (ISAS) FOR INFORMATION ON PRUDENTIAL’S ISA...
These are a tax-effective way to invest in call 0800 072 6159 or visit
different assets, including cash, bonds and www.pru.co.uk/save_invest/prudential_isa2/
shares. An ISA lets you buy certain investments
and keep any returns you make on them free of
income or capital gains tax under current legislation. INDEX-LINKED SAVINGS CERTIFICATES
So an ISA is a tax-efficient wrapper, protecting your
investment – whether cash, equities, bonds or With index-linked savings certificates from National
property – from the taxman. Savings and Investments:
the value of your savings is increased in line
At the moment you can:
with inflation (as long as you keep your
invest up to £7,000 in ISAs each tax year as
investment for at least a year) with a guaranteed
an individual – which means your partner or
rate of interest on top – so you can be sure the
spouse will have the same allowance
returns on your savings will outstrip inflation, and
choose whether to invest your entire £7,000
all returns are tax-free – and you can invest
allowance in one Maxi ISA, or divide it across
up to £15,000 in each issue without affecting
two separate Mini ISAs – up to £3,000 in a
any other tax-free investments you may have.
Mini Cash ISA and up to £4,000 in a Mini Stocks
and Shares based ISA.
22 All ISA figures are for tax year 2007/08
23. 6
MAKING YOUR DECISION
TAX EFFICIENT SAVINGS continued
PREMIUM BONDS
This government-run prize draw offers a fun way
to invest. Each premium bond is worth £1 but must
be bought in blocks of a minimum of £50 via standing
order or £100 by cheque or cash. Each individual ERNIE
bond is put into a prize draw and gives you a chance
Electronic Random Number Indicator
to win a tax-free cash prize randomly decided by
Equipment still picks the winning
ERNIE, the famous computer. Every eligible bond
numbers, although these days he’s a little
has a separate and equal chance of winning a prize,
bit quicker than he used to be. ERNIE 1
irrespective of where or when it was bought. Best
was produced in 1957 and if he was still
of all, premium bond prizes are tax-free.
in use today, it would take 52 days to
You could win a prize each month ranging from £50 complete the draw. In 2004, ERNIE 4 was
up to £1 million. The more premium bonds you hold, unveiled and he completes the draw in
the better your chances of winning. Even if you under two and a half hours. Today, ERNIE
never win a big money prize, you will always at least is the size of a personal computer, but
get your money back. And you have much better back in 1957 he was the size of a van.
odds with ERNIE than with the National Lottery.
Source: www.nsandi.com, April 2007
PRUDENTIAL INVESTMENTS 0800 072 6159 www.pru.co.uk/save_invest 23
24. 7 OTHER TYPES OF INVESTMENTS
MAKING YOUR DECISION
INVEST IN A BUSINESS ALTERNATIVELY, DIG OUT A VAN GOGH
Maybe you’ve always dreamed of owning a café or a It may pay you to clear out your attic. Because you
florist shop. You could set up in business using your might just find an original painting you’ve forgotten
savings. By employing an experienced manager, you about. If you were to find a Van Gogh, here’s how much
can work your own hours while benefiting from any it could be worth: US $82.5 million. Since that’s how
profits. If you do your research and grow your customer much a Japanese investor allegedly paid for Van Gogh’s
base, it could be very rewarding – but to be frank, the ‘Portrait of Dr Gachet’.*
risks are variable with no cast-iron guarantee of reward.
*Source: www.eyeoftheart.com
BECOME A WINE CONNOISSEUR
Some people invest in such things as antiques,
rare coins and fine wines. It’s beyond the scope of
this guide to tell you which Bordeaux to invest in, but if
you know your stuff you could earn a living this way.
However, as with all investments, remember that there
are risks, including changing tastes, unpredictable
markets and even breakages.
24
25. 8 QUESTIONS TO ASK
MAKING YOUR DECISION
Here are some key questions to ask before you In addition, you can also do the following:
make your final investment decision:
Look out for any newspaper articles that have been
Is this investment designed to give me income (i.e. written about the investment, or company, you are
regular payments) or capital growth (i.e. one lump considering. (Although past performance doesn’t
sum at the end of the life of the investment)? mean an investment or company will do well in the
future, it could be useful to know about its history.)
In what markets, sectors or companies is my money
invested? Ask yourself if you are happy with the size, strength
and reputation of the company you are buying an
Does this investment have any special conditions
investment from.
– like a fixed investment term?
Does it offer any guarantees?
What are the risks involved with this type of
investment?
How and when can I access my money and are there
any penalties, hidden charges or costs for this?
Are there any tax advantages? That is, can I buy this
investment as a part of my ISA allowance?
PRUDENTIAL INVESTMENTS 0800 072 6159 www.pru.co.uk/save_invest 25
26. 8 QUESTIONS TO ASK continued
MAKING YOUR DECISION
A QUICK RECAP
Before you begin investing, make sure your debts
are under control and think about having an
emergency fund.
Then:
Assess any existing investments you might have and
decide if you’re happy with the balance between
their different risk levels or whether you should you
think about changing any of them.
Decide whether you’re happy with the amount of
money you have in deposit accounts.
Have you (and your partner or spouse) thought
about using your ISA allowance?
If you are eligible for Child Benefit, you could
consider using it to build a long-term nest egg for
your children.
26
27. 9 WHAT TO DO NOW
TAKING ACTION
Contact us for help and information about the Some Prudential Pension and Investment products
following Prudential products: are only available through Financial Advisers as we
believe they require specialist advice.
Prudential Unit Trusts
A Financial Adviser will assess your individual needs
Prudential ISA
and circumstances before recommending relevant
Prudential With-Profits Bond products (not necessarily from Prudential).
Prudential representatives can only provide
information on Prudential products.
To contact us you can:
call 0800 072 6159*between 8am and 6pm, Monday to Friday.
visit us 24 hours a day at www.pru.co.uk/save_invest
Existing Prudential customers can:
email us via PruMail – our secure email system – if you wish to contact us about
an existing policy. Log on to Pru.co.uk for more information.
*Calls may be monitored or recorded for quality and security purposes.
27
28. NOTES Should you need to make some notes – when you talk to us, for instance
– these pages might be just the place.
28
30. TECHNICAL TERMS EXPLAINED
AND FINALLY
Actively managed fund Equities
A fund where a team of analysts and portfolio managers This is another name for stocks or shares in a company.
aim to pick investments that will outperform the average
performance of the stock market. Gilts
A gilt is a loan made to the UK government in return for
Bonds interest.
As an alternative to using your pension fund to buy an
annuity at retirement, an ASP offers a form of income Index-linked savings certificates
drawdown. A government investment that pays guaranteed interest
rates designed to increase the value of the investment in
Capital line with inflation. All returns are tax-free.
Financial wealth in the form of cash or property.
ISA
Compounding
An ISA (Individual Savings Account) offers a tax-efficient
The process by which interest earned on an investment
way to invest. It acts as a wrapper in which you can
is added back to the original sum invested, thus
shelter investments from tax.
increasing the capital amount which will then attract
further interest in future.
30
31. AND FINALLY
TECHNICAL TERMS EXPLAINED continued
OEIC Stocks and shares
An open-ended investment fund structured as a In effect, both words mean the same. A share certificate
company. Investors buy shares, the number of which confers ownership rights in a company. Ordinary shares
varies over time: the share price of the OEIC mirrors (or common stock) give voting rights at company
the value of the underlying investments. meetings and allow the holder to benefit from a share
of the profits.
PEP
PEPs (Personal Equity Plans) were tax-efficient
investment plans that have been replaced by ISAs.
Anyone holding a PEP at 6/4/2000 was allowed to keep
it, although no additional contributions can be made.
Single price
A single price for buying and selling shares, e.g. in
an OEIC.
PRUDENTIAL INVESTMENTS 0800 072 6159 www.pru.co.uk/save_invest 31
32. www.pru.co.uk
While Prudential uses reasonable efforts to ensure that the information contained in this Pocket Planner is current and accurate at the date
of publication, no warranties are made, either expressed or implied, as to the reliability, accuracy or completeness of the information.
Prudential accepts no liability for any loss arising directly or indirectly from the use of or action taken in reliance on such information. These
documents should not be copied, reproduced or redistributed, in whole or in part. ‘Prudential’ is a trading name of The Prudential Assurance
Company Limited. The Prudential Assurance Company Limited is registered in England and Wales. Registered Office at Laurence Pountney
Hill, London, EC4R 0HH. Registered number: 15454.