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Savers step up the risk ladder

Savers can achieve higher income returns by increasing risk
August 12, 2011

The low interest rate environment is forcing more and more savers to take on more risk in the hunt for income. However, you should only put a portion of your assets into higher-risk assets so that not all your capital is at risk, advises Jason Witcomb, director at financial planner Evolve.

A small step up the risk scale from cash is a structured deposit where your initial investment is fully guaranteed, and the risk lies in how much above this you get back. Colin Jackson, director of independent financial adviser (IFA) Baronworth, suggests the Investec FTSE 100 3 Year Deposit Plan 27 and FTSE 100 5 Year Deposit Plan 27, both of which are open until 26 August.

However, structured products are complicated products and incur swap counterparty risk, so this is an area where it is worth getting professional financial advice.

Strategic bond funds have a flexible mandate and can outpace inflation, with some of the funds in this sector generating yields in excess of 7 per cent. However, these are a far cry from cash as they can invest in areas such as high-yield bonds, which have a risk profile closer to equities. Strategic bond funds with good track records include funds from Henderson, Jupiter and Artemis.

Corporate bonds are lower risk than strategic bond funds, but generally don't all yield as much. Minesh Patel, managing director of EA Financial Solutions, feels the risk-reward premium is more favourable on strategic bonds, while some fixed-term cash deposits can yield as much as corporate bonds and are often lower risk.

But your ultimate return will depend on your tax position because a corporate bond fund held in an individual savings account (Isa) might be more tax-efficient than cash held outside it.

Equity income funds can also beat inflation over the medium to long term but equities also experience great volatility. Strong performers include M&G Global Dividend, Schroder Income Maximiser and Artemis Income.

Money market funds can generate more than some cash accounts, but can be considerably higher risk.