Maybe you’ve recently had a windfall bonus, an inheritance or even been lucky enough to win a raffle with a lump sum of £10,000 burning in your pocket.
Investing where you already have money beyond your day-to-day living expenses and an emergency fund for emergencies is one way to help you meet your long-term financial goals.
An amount like £10,000 is not a life-changing sum of money. But wisely invested, it can grow into a useful nest egg. Here’s a look at some of the options available.
Remember that investing is speculative, is not suitable for everyone and it is possible to lose some or all of your money.
1. Consider common investments
Mutual funds, mutual funds and exchange traded funds (ETFs) each fall within the scope of a “collective investment plan”.
In other words, each pool allows contributions from multiple investors to be invested in a portfolio created by a professional fund manager across different asset types. These include bonds, real estate, commodities and stocks, or a combination of both.
Ryan Lightfoot-Amoff, senior research analyst at research provider FundCaliber, points to the benefits of outsourcing investment decisions to a professional fund manager, “who balances different companies, industries and revenue drivers to deliver returns that outperform the market .” will see.”
He adds: “Investors can also benefit from economies of scale in fees
Can often be prohibitive for investors who trade regularly.”
Collective investment schemes can be divided into two parts based on the way they are managed:
- Passively Managed: Also known as tracker or index funds, these funds aim to mimic the performance of a specific stock index. For example, by buying shares in the companies that make up the UK FTSE 100 index.
- Actively Managed: These funds aim to outperform a benchmark (such as a specific stock index) by selecting a basket of stocks.
Because of the way they are managed and operated, active funds are generally more expensive to invest in than their passive counterparts.
Passive funds typically charge between 0.1% and 0.2% of the upfront investment, while the figure for active funds is closer to 0.5% to 1%.
For passive funds this equates to £10-20 for a lump sum of £10,000 compared to £50-100 for active funds.
Passive and active funds diverge, and it’s a hotly debated topic whether active funds outperform their passive counterparts to justify their higher fees.
It is worth taking the time to find the best trading platform to buy and hold these assets as trading and platform fees can vary widely.
Investments can also be placed in tax-friendly packages such as Individual Savings Accounts (ISAs).
2. Invest in stocks
Buying individual shares is riskier than investing in a fund, but investing £10,000 can be a great way if investors have the time and knowledge to research public companies.
FundCaliber’s Mr. Lightfoot-Amoff says, “Investing in individual stocks can offer great upside potential.” But he warns prospective investors that “you’re taking too much risk.”
It’s still important to diversify your portfolio, which means spreading your investments across a mix of companies from different sectors. If one company or sector performs poorly, this is expected to be offset by better performance in another sector.
Like mutual funds, shares can be held in a tax efficient ISA. Likewise, they should be viewed as a long-term investment of at least five years to smooth out fluctuations in the stock market.
3. Invest in bonds
Investing in bonds can be a useful way to get income and a return on your investment on your £10,000.
A bond is a form of debt that pays interest in the form of “coupons,” usually once or twice a year. At maturity, the issuer of the bond repays the original “par value” of the bond. Once the bond is issued, it can be traded in the market.
Noel Cajalis, manager of the Rathbone High Quality Bond Fund, says: “Bonds tend to be less volatile than stocks, which is why they are often favored by conservative investors.”
Ms. Cajalis adds, “Even bonds often have low correlations with stocks.” This means that they behave differently at the same time throughout the business cycle. Bonds can thus be used to diversify an existing stock portfolio.
There are two different types of bonds:
- Government: Known as Gilt in the UK and Treasury in the US. Government bonds are generally considered a safer investment than corporate bonds (see below) and therefore tend to pay a lower interest rate, typically 1-2% over the past five years.
- Built-in: These bonds are issued by companies to raise cash. Investment-grade bonds – as measured by independent rating agencies such as Moody’s – are considered safer than so-called “junk” bonds. So investors can expect a higher interest rate from companies that offer to offset it later.
Although neither the UK nor the US government has ever defaulted on any of their bonds, they are not risk-free assets. It is possible for a bond issuer to default on interest or principal if it encounters financial difficulties.
Like stocks, bonds also fluctuate in price when they start trading, causing them to trade at a premium or a discount to their “par value.” Interest rates have a profound effect on bond prices – if prevailing interest rates rise above the bond’s coupon, the bond will become less attractive to investors and its price will fall.
Consequently, this means that the “yield” (calculated as the annual interest rate divided by the market value of the bond) will increase. Yield is an estimate of the effective interest rate you would receive based on a bond’s current price.
Although rising interest rates have taken their toll on bond prices this year, bonds could become increasingly attractive if interest rates start falling again.
Hal Cooke, senior investment analyst at Hargreaves Lansdowne, commented: “In order to break out of the recession, central banks are likely to cut interest rates to stimulate economic activity. This should lower bond yields and capital values.” It is expected to increase.
4. Invest in real estate
Alternatively, you can put down a £10,000 deposit to buy a home, although climbing the property ladder can be a challenge given the rise in property prices in recent years.
Another option is to invest in real estate indirectly through a Real Estate Investment Trust (REIT).
REITs are similar to mutual funds in that they pool investors’ money but invest it in a portfolio of assets rather than stocks.
Laith Khalaf, Head of Investment Analysis at AJ Bell, says: “REITs offer investors a convenient way to buy into the commercial real estate market that can be held in a SIPP or ISA. shopping centers and extends to industrial units such as warehouses and distribution centers.
Mr. Khalaf says, “Investors may choose to invest in REITs to generate income as commercial property tenants pay regular rents that can translate into dividends for REIT investors.
However, Mr Khalaf also warned: “While the price of the underlying commercial property may not be as volatile as stocks, REITs are traded in the market so they are highly correlated with stocks, which serves as a diversification reduces their ability to work.
“Commercial real estate is an asset that is clearly sensitive to economic developments and will face difficult times as we enter the economic downturn, but a lot of bad news is already reflected in the prices many REITs are doing.”
5. Invest in retirement
Investing in a lump-sum pension is a tax-friendly way to save for retirement because the government “tops” your contributions in the form of tax breaks. According to HMRC, contributions to individual pensions reached a record high of £12bn in 2020-2021, with an average contribution of £1,700 per person.
The amount of tax relief depends on the income tax rate you pay (all figures shown refer to the current tax year 2022-2023):
- If you’re not a taxpayer, you can pay up to £2,880 into the pension, which the Government will increase by 20% to £3,600.
- If you’re a property taxpayer, you can get a similar surcharge from the state, ranging from 20% to 100% of your annual income (under certain conditions).
- High and supplemental taxpayers may receive tax relief of 40% and 45%, respectively, subject to certain annual limits.
The advantage of investing early in your retirement is that you can tap into the power of compound interest, giving you a return on your original investment alongside previous years’ returns.
If you invest £10,000 in a 10 year pension at a 5% annual return your pension pot would be £16,000. However, if you invest the same amount and leave it for 40 years, that becomes over £70,000.
You can invest in an old-age provision privately through a company pension plan or through an individual pension plan you have set up yourself.