SECURE YOUR FUTURE In association with AIB

Ann Murtagh, Business Strategist, AIB

There are ample investment opportunities available, writes Ann Murtagh, But first you must establish your investment needs and then develop and execute an effective investment plan.

At the end of 2006, there was approximately €170 billion worth of funds on deposit with various financial institutions in Ireland. Of this, an estimated €10 billion can be attributed to SSIA accounts. Despite the fact however, that SSIA funds account for a relatively small proportion of overall total funds on deposit (6%), there is huge interest from media, consumers and other industry groups in the various investment options open to SSIA account holders upon their maturity. As a result, it is quite safe to say that the different investment options available in the market have never been the subject of such intense scrutiny. So, what are the main investment options available to potential investors? Broadly speaking, there are four real investment types; cash investments, bonds, property and shares.

Cash Investments

Cash investments are the perfect option for the risk adverse and those who want the principal sum guaranteed. These are generally short-term investments such as deposit accounts with access to the funds on demand or on notice. Due to the fact that the funds are guaranteed, returns on these types of investments can be quite low. However, due to the level of competition between banks at the moment, there has never been a better time to make an investment in a deposit account.

Bonds

Bonds are medium term investments (usually from 2-5 years) and the general rule is, ‘the longer the bond, the greater the return’. The drawback of a bond is that money is locked away until a certain date and investors must consider the opportunity cost of this, i.e. the alternatives that the initial sum could be used for.

Property

Investment in property since the beginning of the Celtic Tiger era has proven to be very popular and very profitable for many. Property can earn a return in two ways, i.e. appreciate in value and / or earn rental income. However, even though property has performed strongly over the past decade, it must be noted that the capital sum invested in the property can decrease in value. Investing in property as a result is not as secure as investing in cash or bonds. Tax issues must also be taken into consideration as gains from investment properties are normally subject to capital gains tax and rental income can be taxed as income tax.

Shares

It is possible for investors to invest directly or indirectly in the stockmarket. By investing directly you are taking control of your investment and paying minimum fees to a stockbroker, but the disadvantage is that it can be a time consuming process as it is necessary to keep up to date on developments and advice is often unavailable. Dividends earned are taxed at your top income tax rate and any gains (in excess of €1,270) are also liable for capital gains tax. This is generally considered to be the riskiest form of investment. Investing indirectly involves a professional managing the portfolio of stocks and shares and this is seen to be a safer way of investing money. There are managed funds which offer a mix of investment types and are quite popular as they offer a degree of certainty while maintaining an element of risk. Both gains and dividends are taxed at 23% and a fee is charged by the stockbroker for managing the investment.

Identify Investment Needs

Before assessing which investment option is the best for you, I would recommend developing an investment plan. An investment plan is really about identifying what you want to get out of your investment. Before you even think about the various investment options that are out there, you need to decide what you hope to get from your investment and develop a plan to help you achieve this. This makes good practical business sense, as it’s very unlikely that you would invest money in something like a new business venture for example, before establishing a sound and viable business plan. Investing your money elsewhere should be no different. Developing an investment plan will help you understand and set your own financial objectives.