fixed rate bond or geb

BEAMO1SHARON1

would it be best to invest a lump sum in a fixed rate bond or are gebs worth considering i have used my isa allowance for this year:j

dunstonh

Most GEBs are poor value and low quality. A few gems come round from time to time but its best to start on the basis they are no good until proven otherwise.

BEAMO1SHARON1

thanks dunstonh
could you point me into the right direction were to put a lumpsum

jamesd

A GEB can be built in many ways. One way is to put money in a fixed rate account and use the interest to provide the guarantee, then buy the variable investment.

So one DIY GEB would be 90% in a fixed rate 5% savings account for a year and 10% in whatever you want to be linked to. Say a FTSE 100 tracker. The result is a 100% capital guarantee provided the FTSE doesn't fall by more than 50%. You get some FTSE upside from the 10% in that.

If you want a longer term you could look for a five year 5% savings account deal. If you put 78% of the money in that it'll guarantee that you get 100% of your money back after five years and you can put 22% in something else. Say you're willing to accept a capital loss if that something else falls by more than 50%, as GEBs usually do. That means you can put more in the something else.

So, 65% in a five year term deposit account and 35% in a FTSE 100 tracker gives you a DIY FTSE 100 GEB with 35% participation in FTSE upside and capital guarantee unless the FTSE falls by more than 50%.

Here's how the guarantee works on that. After five years the 65% has grown at 5% a year and is now worth 83% the amount you started with. If the FTSE falls by 50% the 35% is now worth just 17.5%. 83% + 17.5% = 100.5%, so the capital guarantee worked after a 50% FTSE drop.

If instead the FTSE doubled, you'd have 83% from the fixed interst part and 70% from the FTSE part, for a total of 83% + 70% = 153%. About 50% participation in the upside.

If you're willing to take some risk of capital loss you can use a corporate bond fund for the "guarantee" part. Or for part of it, depending on just how much downside you're willing to risk.

jamesd

I don't really think that that sort of quite strong 50% drop protection is worth paying for today. I think that if you're looking ahead five years there will be ample time for recovery.

You might consider something like the Invesco Perpetual Monthly Income Plus fund for 60% and a fixed rate term deposit for the other 40%. The 40% cash offers a fair bit of protection - it guarantees 51% of the starting value after five years at 5%. That fund is a mixture of corporate and government bonds with a modest share component that might fall 30% in a bad year, leaving you with 42% of what you started with if it did fall by 30%. 42% plus the 51% from the cash is 93% and that's pretty good protection.

But how much are you looking at saving or investing and how much variation would really bother you? You can pick whatever you want and adjust the mixture so it's likely to protect you as much as you need, with you getting less potential gain as you increase the level of certainty you're after.

BEAMO1SHARON1

i am looking to invest £20,000 i am split now between a fixed rate bond or a fixed rate account but should i invest for long term or short term.
comments much appreciated

dunstonh

i am looking to invest £20,000 i am split now between a fixed rate bond or a fixed rate account but should i invest for long term or short term.

OK, what you have effectively said is, I have a journey to make. Shall I buy a car, a bike, a helicopter or a plane. Should I go east or should I go west. Problem is that we dont know where you want to go.

First thing to decide is if you want to invest or save. You say invest but then suggest fixed term deposits but then ask long or short term. Short term is less than 5 years. Medium term is 5-10 and long term is 10+ Which do you want?

jamesd

To add to dunstonh's questions:

Do you have any anticipated need to draw on these funds? Do you expect the possibility of having a need for unexpected access to them, and if so any idea how much (so we can judge whether fixed term deposits might be suitable).

If you did need the money in an emergency or for another reason before your planned time to take it out, what drop in value for that portion would you accept?

Say you wanted to have half available for unexpected withdrawing but were not really planning to use the money for something for 15 years, that means you'd need to put half in things that were accessible so no more than half could be in fixed term deposits. Easy enough to do this sort of thing, we just need some guidance from you on how you expect to use the money.

BEAMO1SHARON1

hi all
i would be looking for 5years were i would not need to access the funds