You may have recently received an extraordinary bonus, an inheritance or even been lucky enough to win a raffle that landed a lump sum of £10,000 in your pocket.
Where you already have money at your disposal beyond your day-to-day expenses and an emergency fund set aside for emergencies, investing is one way to help you achieve your long-term financial goals.
An amount like £10,000 is not a life-changing sum of money. But, invested wisely, it could turn into useful savings. Here’s a look at some of the options available.
Remember that investing is speculative, not for everyone, and it is possible to lose some or all of your money.
1. Consider collective investments
Funds, investment trusts and exchange traded funds (ETFs) fall under the cloak of the ‘collective investment’ scheme.
In other words, each pools the contributions of numerous investors, allowing a professional fund manager to invest the entire money in a portfolio prepared across various asset classes. These include bonds, property, commodities, and stocks, or a combination of each.
Ryan Lightfoot-Aminoff, a senior research analyst at research provider FundCalibre, points to the benefit of outsourcing investment decisions to a professional fund manager “who will seek to create a balance between different companies, industries and income generators to generate above-average returns. market”.
He adds: “Investors can also benefit from economies of scale when it comes to fees, which
it can often be a ban for investors who trade regularly.”
Collective investments can be divided into two based on the way they are managed:
- Passively Managed: Also known as trackers or index funds, these aim to copy the performance of a particular stock index. For example, by buying shares of the companies that make up the UK FTSE 100 index.
- Actively managed: These funds aim to beat a benchmark (such as a certain stock index) by choosing a basket of stocks.
Due to the way they are managed and run, active funds are often more expensive to invest in compared to their passive counterparts.
Passive funds, as a general rule, charge between 0.1% and 0.2% of an initial investment, while the figure for active funds is more likely to be between 0.5% and 1%.
For passive funds, this equates to £10-20 for a lump sum of £10,000, compared to £50-100 for an active fund.
Passive and active funds divide opinion and it is 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 investments, as trading and platform fees can vary significantly.
Investments can also be held in tax-efficient wrappers, such as individual savings accounts (ISAs).
2. Invest in stocks
Buying individual shares is riskier than investing in funds, however it can be a good way to invest £10,000 if investors have the time and knowledge to research public companies.
FundCalibre’s Mr. Lightfoot-Aminoff says: “Investing in individual stocks can have far greater upside potential.” But he goes on to warn potential investors that “you are taking significantly more risk.”
It is still important to diversify your portfolio, in other words, to spread your investment among a mix of companies from different sectors. If one company or sector performs poorly, hopefully another sector will make up for it by performing well.
As with funds, stocks can be held within tax-efficient ISAs. Similarly, they should be viewed as a long-term investment of at least five years to smooth out the rises or falls of the stock market.
3. Invest in bonds
Investing in bonds could be a useful way to generate income and return on capital from your £10,000.
Bonds are a form of loan that pays interest in the form of a “coupon”, usually once or twice a year. At the end of the term, the issuer of the bond will pay the original ‘par value’ of the bond. Once a bond has been issued, it can be traded on a market.
Noelle Cazalis, manager of the Rathbone High Quality Bond Fund, says: “Bonds tend to be less volatile than stocks, which is why conservative investors tend to prefer them.”
Ms. Cazalis adds that: “Bonds also tend to show a low correlation to stocks.” This means that they tend to behave differently at the same times in a business cycle. As such, bonds can be used to diversify against an existing portfolio of stocks.
There are two different types of bonuses available:
- Government: known as ‘gilts’ in the UK and ‘Treasuries’ in the US. Government debt is generally considered a safer investment than corporate debt (see below) and therefore generally pays a lower interest rate, typically 1-2% over the past five years.
- Corporate: These bonds are issued by companies looking to raise cash. ‘Investment grade’ debt, as measured by independent rating agencies such as Moody’s, is considered safer than so-called ‘junk’ bond status. Therefore, investors can expect a higher interest rate from companies offering the latter to offset this.
Although neither the UK nor the US government have ever defaulted on one of their bonds, they are not a risk-free investment. The bond issuer may not make the interest or final payment if you run into financial difficulties.
Like stocks, bonds fluctuate in price once they start trading, allowing them to trade at a premium or discount to their ‘par’ value. Interest rates have a large influence on bond prices: if prevailing rates rise above a bond’s coupon rate, the bond will become less attractive to investors and its price will fall.
As a result, this means that the ‘yield’ (calculated as the annual interest rate divided by the market price of the bond) will increase. The yield is an approximation of the effective interest rate you will receive on a bond based on its current price.
Although rising interest rates have taken a toll on bond prices this year, bonds may become increasingly attractive once interest rates start to fall again.
Hal Cook, Senior Investment Analyst at Hargreaves Lansdown, comments: “To get out of a recession, central banks are likely to cut interest rates to boost economic activity. This should lower bond yields and increase equity values.”
4. Invest in properties
Alternatively, you could put the £10,000 down as a deposit to buy a house, however it can be challenging to climb the property ladder due to the boom in property prices in recent years.
Another option is to invest in property indirectly through a real estate investment trust (REIT).
REITs are similar to funds in that they pool money from investors but invest it in a portfolio of properties, rather than stocks.
Laith Khalaf, head of investment research at AJ Bell, says: “REITs offer investors a convenient way to buy into the commercial real estate market, which can be held in a SIPP or ISA. The commercial real estate market encompasses office buildings, commercial spaces such as shopping malls, and industrial units such as warehouses and distribution centers.
Mr. Khalaf adds: “Investors may choose to invest in REITs to earn income, because commercial property tenants pay regular rents that REITs can convert into dividends for investors.
However, Khalaf also cautions: “While the price of the underlying commercial real estate assets may not be as volatile as stocks, REITs are publicly traded, so they will be highly correlated with stocks, lessening their ability to act as a diversifier.
“Commercial property is an asset that is clearly sensitive to economic developments, and it will face tough times as we enter an economic slowdown, but a lot of bad news is already reflected in the prices at which many REITs are trading.”
5. Invest in a pension
Investing a lump sum in a pension is a tax-effective way to save for retirement, as the government ‘tops up’ your contributions in the form of tax relief. According to HMRC, personal pension contributions reached a record £12bn in 2020-21, with an average contribution of £1,700 per person.
The level of tax relief depends on the income tax rate you pay (all figures are shown based on the current 2022-2023 tax year):
- If you are not a taxpayer, you can pay up to £2,880 in a pension, which the government increases by 20% to £3,600.
- If you are a basic rate taxpayer, you can receive the same 20% supplement from the government, up to 100% of your annual income (subject to certain conditions).
- Higher rate and additional rate taxpayers may receive a tax break of 40% and 45% respectively, subject to certain annual limits.
The benefit of investing early in a pension is that you benefit from the power of compounding returns, so you receive a return on your initial investment plus the previous year’s return.
If you invested £10,000 in a pension over 10 years with a 5% annual return, your pension fund would be worth £16,000. However, it would grow to over £70,000 if she were to invest the same sum and leave it for 40 years.
You can invest in a pension through a workplace plan or privately through a self-invested personal pension.