Investing for the potential to out-strip inflation Go compare with our comparison table

Investing for the potential to out-strip inflation

17 June 2011 / by Paul Dicken

The official figures for the rate of increases in the cost of living for May showed CPI at 4.50 per cent, unchanged from April, and 2.50 per cent over the Bank of England’s target level.

How much of a problem is inflation? Depending on who you are and what you spend your money on you could be affected differently by rises in inflation.

The proportion of your expenditure on certain costs, such as domestic energy, could mean you see a greater or lesser impact on your finances from rising prices. This is because different elements over time may be driving up the overall inflation, while other items are increasing more slowly.

Inflation for investors

Inflation is a concern for investors because it can impact the ‘real return’ you are making from the returns on your investment. If you take the current headline inflation rate of 4.5 per cent – when the official interest rate, or Bank Rate, is at a historic low of 0.50 per cent – finding a return of over 4.5 per cent can be difficult.

Views differ on how inflation will pan out in the UK and elsewhere. So, while UK inflation is relatively high now and could inch higher over the next few months, many expect a fall in inflation next year.

A recent briefing from Legal and General Investment Management (LGIM) said said it maintained the view that ‘the official cash rate is unlikely to move higher than 1% during 2012. Inflation is likely to fall sharply next year, but still remain slightly above the BoE’s 2% target.’

However, over the Atlantic, LGIM warned that the US could see higher inflation after a long period of low price increases. A combination of factors, from price rises on goods from China to rent increases could see inflation climb.

Some of the options


Investments that offer the potential for above inflation returns range from investment funds to fixed term structured investment products.

Funds

The yields on investment funds vary, but the Schroder Income Maximiser Fund aims to hit a seven per cent a year target. As well as investing in UK equities, the fund uses financial instruments known as futures contracts on some of the stocks it owns to generate additional income.

Although past performance is not a guide to future performance, the fund has paid annual dividends of over seven per cent since its launch in 2005.

Compare income funds »

Structured investments

This type of investment offers the potential for defined returns over a fixed term, such as five years.

The Investec FTSE 100 Enhanced Kick Out Plan 21 is a five year plan that could mature early. If the plan does mature early or ‘kick out’ it will pay 10.75 per cent for each year the plan has been going (not compounded). For the plan to mature early the FTSE 100 has to be higher than its starting level at the anniversary point. The plan could ‘kick out’ after one year, if the criteria are met.

If the plan runs for the full five years the return will be 1.2x any growth during that time in the FTSE 100 Index.

Compare other structured investment plans »

No news, feature article or comment should be seen as a personal recommendation to invest.

The value of investments and income from them can fall as well as rise and you may not get back the full amount invested. Different types of investment carry different levels of risk and may not be suitable for all investors.

Structured investment plans are not capital protected and are not covered by the Financial Services Compensation Scheme (FSCS) for default alone. There is a risk of losing some or all of your initial investment. There is a risk that the company backing the plan or any company associated with the plan may be unable to repay your initial investment and any returns stated. In addition, you may not get back the full amount of your initial investment if the plan is not held for the full term.

Prior to making any decision to invest, you should ensure that you are familiar with the risks associated with a particular investment. If you are in any doubt as to the suitability of a particular investment, both in respect of its objectives and its risk profile, you should seek independent financial advice.

© Fair Investment Company Ltd

Investing For Growth
 Product NameISA OptionMaximum Potential ReturnTermMore Info
FTSE 100 Enhanced Kick Out Planyes

10%

per annum

Up to
6 years
More Info >
Structured investment plan with the potential to mature after years 1, 2, 3, 4, 5 or 6. If the plan matures early it will return 10% times the number of years the plan has been in force. Also available for Stocks & Shares ISA and ISA transfer.
FTSE 100 Defensive Kick-Out Planyes

7.75%

per annum

Up to
6 years
More Info >
Structured investment plan with the potential to mature after years 3, 4, 5 or 6. If the plan matures early it will return 7.75% times the number of years the plan has been in force. Also available for Stocks & Shares ISA and ISA transfer.
Kick Out Deposit Planyes

3%

per annum

Up to
6 years
More Info >
Capital protected deposit plan with the potential to mature after years 3, 4, 5 and 6. If the plan matures early it will return 3% times the number of years the plan has been in force. Also available for Cash ISA and ISA transfer.

The value of investments and any return from them can fall as well as rise and you may not get back the full amount invested. Please ensure that you read the Important Risk Information below.