NS and I - Guarantted Bonds

They are complete and utter rubbish.

As a product, they are a marketing dream. Everything seems so good to the inexperienced investor. A capital guarantee, stockmarket growth potential and no charges. However, scratch the surface and it starts to show its flaws. Problem is that inexperienced investors do not scratch that surface and get caught out.

Lets look at the failings in detail:

1 - No charges. Sounds good but what it really means is that there are no explicit charges (i.e. no 1.5% p.a. annual managment charge). However, there are charges. You just cant see them. For example, you are investing in the FTSE100 so where are the dividends? There are none paid. So, where is the 4% p.a. dividend income going? Its going to the provider.

2 - linking on from that, the capital security bit. If the FTSE100 isnt higher in 5 years time, you get your money back. If the stockmarket crashes and you had a UK equity unit trust , you would expect around a 20% drop on a portfolio. So, 5 years multiplied by those 4% p.a. dividends = 20%. Is the capital security really worth it?

3 - The Bond tracks the FTSE100 index. This is now the weakest UK index and is not expected to improve in the near future. Had you invested at any time from 1998 to 2003 in one of these bonds, you would not have made any profit. You would have got your money back. To put that in perspective, had you invested in an average UK equity income fund (a proper stockmarket unit trust fund) and invested in Jan 2001, right before the stockmarket crash (note that this stockmarket crash was the worst in recent history and investing before is the unluckiest time to do it) you would now have turned £10,000 into £15,383. The NS&I had it been taken at the same time would have given your initial £10,000 back. In effect, you have lost money on the NS&I bond because inflation has eaten in to that £10k making it worth less than £9000 in real terms.

4 - Averaging - The NS&I bond average out the first 5 days and the last 6 months of the bond. This is marketed as protection for you but its also a way of reducing the return in a growing market.

5 - The provider will not be investing your money in the FTSE100. They will have it invested in a range of areas that you can invest in as well. They will be looking for a return of around 5-10%p.a. higher than what you will get. Just look at that example above from 5 years ago. They probably returned around 10% pa. on investors money from 2001. However, the investors got zilch.

As the 112% bit, that means if the FTSE100 grows at 10% over that 5 year period, then you will get 112% of 10% making a return of 11.2%

These are really poor products which have some really positive sound bites which attract inexperienced investors. However, the reality is that you are missing out on more than you are gaining. They are cash cows to the providers.