Prudential Investments


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Prudential Investments

  1. 1. YOUR HANDY GUIDE TO CHOOSING THE RIGHT INVESTMENTS How to make your money work harder
  2. 2. Investing is simpler than you may think.
  3. 3. When it comes to investing your hard earned cash, there is a huge variety of products and options available. In fact, so many that it can be confusing. Yet once you know the basic principles of investing, you’ll soon be able to make confident choices and enjoy potentially higher returns than those offered by a bank or building society account. All investments carry a degree of risk, but some are more risky than others. This guide from the Prudential aims to help you determine your attitude to risk, get an overview of some of the types of investment that are available, and make informed decisions about how, when and where to invest for the future. The more adventurous you are, and the more prepared you are to take a calculated risk, the greater your potential returns. And if you have any questions, we’re always here to help. 3
  4. 4. UNDERSTANDING INVESTMENTS Page 1 Where, when and how long 6 to invest 2 Five categories of assets 9 YOUR WAY AROUND THE GUIDE Information in this handy guide is based on our understanding of current taxation, legislation and HM Revenue & Customs practice, as at May 2007, all of which are liable to change without notice. The impact of taxation (and tax relief) depends on individual circumstances. 4
  5. 5. MAKING YOUR DECISION AND FINALLY Page Page 3 Your attitude to risk 14 Technical terms explained 30 4 Balancing risk and reward 15 5 Collective investments 17 6 Tax efficient savings 22 7 Other types of investments 24 8 Questions to ask 25 TAKING ACTION Page 9 What to do now 27 5
  6. 6. UNDERSTANDING INVESTMENTS 1 WHERE, WHEN AND HOW LONG TO INVEST Store Card Before you start investing, it’s a good idea to think about using any spare money you have to clear debts – such as credit, store cards Card and loans. The interest rates charged on these can be high, so it Credit 1234 5678 9123 4567 11/99 11/02 makes sense to clear such debts before you begin. Once that’s Mr G Print 123 9 4567 done, you can think about setting up an emergency fund that’s easy 123 4 5678 2 11/0 11/99 to dip into – an easy access savings account for instance, where int Mr G Pr your money will be secure and which will provide you with enough to live on for about six months. You should also think about taking out insurance to RED TO cover common risks such as your life and health. PREPA E NOT 10 “IF YOU’R R ES FOR Consider your retirement needs, too. It’s never too early O SHA D HOL D ONT N ’T HOL to start putting money aside for the future – in fact the HOULD YOU S .“ YEARS, M INUTES earlier, the better. With all that taken care of, you’re FOR 10 THEM ffet, ready to start making considered investment choices Bu Warren st investor and attracting potentially high returns on your money. Americ a’s riche 6
  7. 7. 1 WHERE, WHEN AND HOW LONG TO INVEST UNDERSTANDING INVESTMENTS continued WHERE TO INVEST WHEN TO INVEST It’s the potential to make more of your money There’s no time like the present when it comes to that’s one of the biggest reasons for investing. investing. You may feel you need a large sum to invest And for this, the stock market, for instance, has almost if you are to build a future fortune. But however much always been a more rewarding (though riskier) option or how little you have to invest it’s never too late than putting cash in a bank or building society account. to start. If you’re worried about investing during a stock market high or low, don’t worry. You can smooth the ups Since 1962, shares have beaten cash... and downs by investing little and often. in 96% of all 10-year periods* HOW LONG TO INVEST FOR in 100% of all 15-year periods* Another key to growth is the length of time in 100% of all 20-year periods* you invest over. Ideally, you need to think long term – which means at least five years. w *Source: M&G statistics as at 31 August 2006 PRUDENTIAL INVESTMENTS 0800 072 6159 7
  8. 8. UNDERSTANDING INVESTMENTS 1 WHERE, WHEN AND HOW LONG TO INVEST continued INVESTING FOR INCOME OR GROWTH INVESTING FOR INCOME AND GROWTH There are two main ways of investing, for: It’s also possible to invest for both income and growth. Investments that can help you achieve this include 1 INCOME equity-based funds invested in both the UK and abroad. Investing for income means that you use the interest and dividends earned from your savings and investment plans to boost your earnings or pension income. These investments could include PEPs, ISAs, savings accounts and bonds. 2 GROWTH Investing for growth means that you plough your interest or dividends straight back into your fund so that it grows still further through the power of compounding. Compounding means you earn money on your original investment plus on any dividends or interest earned. So your capital can steadily increase, attracting more potential growth all the time. 8
  9. 9. 2 FIVE CATEGORIES OF ASSETS UNDERSTANDING INVESTMENTS Bonds, dividends, ISAs – this guide from the Prudential 1 CASH will explain them all and make your investment choices clear. To make it simpler, there are five types of Basically, you deposit your cash into a bank or assets you can invest your money in: building society and your money is invested for you (often by being lent to someone else). In return you 1 CASH receive interest on your capital. This is seen as a safe investment, but the returns are often low, 2 GILTS (GOVERNMENT BONDS) depending on the market rate. 3 CORPORATE BONDS 4 EQUITIES (STOCKS AND SHARES) 5 PROPERTY PRUDENTIAL INVESTMENTS 0800 072 6159 9
  10. 10. 2 UNDERSTANDING INVESTMENTS FIVE CATEGORIES OF ASSETS continued 2 GILTS (GOVERNMENT BONDS) WHY ARE THEY CALLED GILTS? With gilts, you loan your money to the UK Government bonds are known as ‘gilts’ because Government. Your returns will be paid in the form the certificates were originally edged with gilt, which of a regular income (known as the ‘coupon’). showed how golden the Government’s finances At the end of the period the loan is repaid on the were considered to be. ‘redemption date’. Meanwhile, your money will have gone towards funding road maintenance, schools, etc. You can buy or sell gilts whenever you choose. Gilts are the most secure type of bond you can obtain because the Government has never failed to pay its debts and is unlikely to go bankrupt. The coupon is fixed and regular no matter which political party is in Government at the time – the actual amount will vary from issue to issue. Your total return will depend on the price at which you buy and sell. Gilts can be a good way to provide yourself with an income. 10
  11. 11. 2 UNDERSTANDING INVESTMENTS FIVE CATEGORIES OF ASSETS continued 3 CORPORATE BONDS This is when you loan your money to a public company in return for a fixed rate of interest. As with gilts, you can buy and sell corporate bonds whenever you want, so you’re not locked in for any length of time. When it comes to risk, corporate bonds have a broad range. It all depends on the underlying strength of the company you invest in. Lower risk corporate bonds pose less risk to your capital, but may mean lower returns on your investment too. Higher risk bonds are just the reverse – they expose your capital to more risk, but can mean a potentially higher level of return on your investment. On the whole, corporate bonds tend to offer better returns than gilts, but are less secure as the Government doesn’t underwrite them. PRUDENTIAL INVESTMENTS 0800 072 6159 11
  12. 12. 2 UNDERSTANDING INVESTMENTS FIVE CATEGORIES OF ASSETS continued 4 EQUITIES (STOCKS AND SHARES) Equities mean you buy a share or shares in a Once you own shares, you may also receive an company and become a ‘part-owner’. The price of a income from them in the form of dividends. The share that you buy (or sell) depends on a few factors: value of your dividends will depend primarily on how how well the company is expected to perform in the well the company you’ve invested in is doing. future, how many people want the shares; and how Investing in individual shares can be risky. You many shares are available (in a nutshell, ‘supply should carefully research the management and market and demand’). potential of any company you are interested in. If you Of course, a number of things can happen to shares go this way, make sure you have all the key facts to once you’ve bought them since the stock market can hand before making a decision. be up one day and down the next, or the performance of the company could change. So the value of your shares could rise or fall. 12
  13. 13. 2 UNDERSTANDING INVESTMENTS FIVE CATEGORIES OF ASSETS continued 5 PROPERTY Investing in commercial or residential property can provide an income in the form of rent. Buy-to-let properties are popular at the moment and if you do your homework and buy a property in an area where prices rise, you can eventually sell and make a profit, too. But unless you find a buyer immediately, it may take some time before you get your hands on it. Likewise, if the value falls to less than the original price you paid, and you have to sell, you’d make a loss. The downside is that you’re liable for tax on some or all of the income received from your tenants, and you could incur capital gains tax on any profit when you sell. Also, if there’s a gap between tenants’ occupancies you’ll still have to cover the mortgage. PRUDENTIAL INVESTMENTS 0800 072 6159 13
  14. 14. 3 YOUR ATTITUDE TO RISK MAKING YOUR DECISION When you invest your capital there is always a As a guide, you should take the following into account: degree of risk involved, whether it’s high or low. Equities are considered high risk, for example, while your personal circumstances (your age, and a deposit account is low risk. Generally, the higher the how much money you’re prepared to invest) risk, the higher the potential increase in your capital the length of time you want to keep your (and the higher the potential loss). In fact, with some money invested investments you could risk losing not only the return on your investment, but also your capital itself. how much access you need to your capital So for reasonable returns, some risk may be necessary your attitude to risk (how much you’re – meaning that the value of your capital could go down prepared to lose) as well as up. Therefore you need to decide how much tax implications money you are prepared to risk if you take this approach. the effect of inflation in reducing the value Only you can decide how much risk you’re of your capital over time. prepared to accept. However, armed with some facts and figures, you may be ready to take calculated investment risks and balance them out with other, less risky investment strategies so that your chances of higher overall gain remain good. 14
  15. 15. 4 BALANCING RISK AND REWARD MAKING YOUR DECISION Most experts suggest you aim for a ‘balanced’ HIGHER Direct HIGHER portfolio. This means spreading your investments Investment in Stockmarket across a range of products to minimise your exposure to risk. In turn, this means your individual Specialist investments will have a different potential for growth Funds (and of course, loss). UK Equity POTENTIAL REWARDS Given some forward planning, you can decide on the Funds* POTENTIAL RISKS amount of risk with which you’re most comfortable. Balanced Managed*, Use the pyramid (right), to work out which products Distribution*and are right for you, depending on your attitude to risk. Property Funds* Please note that this risk assessment has been With-Profits Funds and Cautious Managed Funds* classified by Prudential and the ABI and is not a generic description across the fund management Gilts, Fixed Interest Deposits sector. The investment approach may change in and Shorter Dated Bonds the future. Cash and Deposit Accounts / Cash ISAs / Premium Bonds LOWER LOWER *As classified by the Association of British Insurers. PRUDENTIAL INVESTMENTS 0800 072 6159 15
  16. 16. 4 MAKING YOUR DECISION BALANCING RISK AND REWARD continued CHOOSE YOUR INVESTMENTS WISELY, TO CONTROL YOUR EXPOSURE TO RISK Some investments offer features that help reduce risk. For example, a with-profits fund benefits from the smoothing effect (described on page 18). And if you invest in a guaranteed equity bond your capital will usually be guaranteed, providing you keep your money invested for the duration of the term. (You’ll need to check the specifics with your provider.) While most of us would like to say “no” to risk completely, the nature of investments means there’s always some level of risk involved. The trick is to keep your balance. 16
  17. 17. 5 COLLECTIVE INVESTMENTS MAKING YOUR DECISION GO IT ALONE OR BECOME A COLLECTIVE INVESTOR As a private investor, you may not have the time or expertise to create a diverse portfolio that helps to spread your investment risk. So another choice you need to make is whether you’re going to invest on your own, or make ‘collective’ investments as When you make a collective investment, you invest in part of a group. Most private investors tend to invest a fund. Think of a fund as a briefcase containing one collectively – which means their investments are pooled or a mixture of items such as stocks and shares, equities, with lots of people’s money and spread over a bonds, property or cash. You can even invest in funds number of different investments. made up of other funds. In this instance, your fund-of- Unit trusts and OEICs (Open-Ended Investment funds briefcase will contain smaller briefcases which in Company), for instance, pool together lots of money turn contain similar sets of assets. from thousands of small investors to spread their risk So as you can see, a fund can contain a great variety of and give them the clout of a multi-millionaire. things. And it’s this variety, spread across different risk levels, that often makes collective investments an attractive option. PRUDENTIAL INVESTMENTS 0800 072 6159 17
  18. 18. 5 MAKING YOUR DECISION COLLECTIVE INVESTMENTS continued WITH-PROFITS BONDS UNIT TRUSTS This is a bond that invests in a with-profits fund, Unit trusts are collective investments that allow which in turn invests in a mixture of equities, you to invest indirectly in shares, both in the bonds, property and even cash. With-profits UK and overseas, while benefiting from expert bonds benefit from smoothing. Smoothing basically investment management. means holding back some of the profits in years To help you select the right unit trust, first define when returns are good, in order to help the fund your aims for it. Next, do your research. Some funds maintain its payouts in leaner years. This reduces the will charge high management fees. If they do, make impact of ups and downs in the underlying sure you get value for money. You should expect investment performance, so it helps to give you a an actively managed fund (one where a team of steadier return on your capital. analysts and portfolio managers aim to pick the best performing funds) to beat the average stock market A with-profits bond is unsuitable as a short- performance, known as the market index. term investment. The value of the bond depends on how much profit the company makes and how Other unit trusts are known as trackers. This means they decide to distribute it. they aim to mirror the performance of the index rather than try to beat it. As a result, the gains (or losses) might not be as spectacular as some actively managed funds. 18
  19. 19. 5 MAKING YOUR DECISION COLLECTIVE INVESTMENTS continued OEIC (OPEN-ENDED INVESTMENT COMPANY) A number of unit trusts have been converted into OEICs. Basically the OEIC is an investment company where shares are issued instead of units. The principal difference is that OEICs have a single price to which the initial charge for purchase is added. FOR INFORMATION ON PRUDENTIAL’S... With-Profits Bond call 0800 015 4621 or visit prufund_investment_plan/ Unit Trusts call 0800 072 6159 or visit prudential_unit_trusts/ PRUDENTIAL INVESTMENTS 0800 072 6159 19
  20. 20. 5 MAKING YOUR DECISION COLLECTIVE INVESTMENTS continued MORE ABOUT FUNDS There are several types of funds available, including: It’s important to know this about funds: EQUITY FUNDS ■ The various assets that make up a fund can be changed over time, or they can stay as they are. These are often unit trusts or OEICs. They are made up primarily of stocks and shares. ■ Funds are generally looked after by a fund manager, which means that when you invest in a fund, you are For information on investing in an Equity Fund with also investing in the fund manager’s opinion, research Prudential, call 0800 072 6159 and expertise (as well as the strength of the company or visit / he or she works for). prudential_unit_trusts / ■ You’ll also need to give some thought to what level of risk a fund involves before you invest in it. CORPORATE BOND FUNDS This is where you invest in a range of corporate bonds. PROPERTY FUNDS These invest in a portfolio of commercial and residential properties. 20
  21. 21. 5 MAKING YOUR DECISION COLLECTIVE INVESTMENTS continued DISTRIBUTION FUNDS THE ART OF INVESTING Distribution funds are specifically designed to When forming an opinion about investing in produce a regular income over the longer term. stocks and shares or funds, there are a few things that might help. You can read financial You can receive an income when it suits you. newspapers and magazines, eavesdrop on Depending on the option you choose this could be conversations between brokers, bankers, monthly, every three, four or six months, even once analysts and traders. a year. The amount you need to invest varies according to the scheme on offer, but you can start And you could also consider a few words from £5,000. You should be happy to invest for the by Peter Lynch*, one of the world’s most longer term – at least five years. successful investors: For information on Prudential’s Distribution Funds “GO FOR A BUSINESS THAT ANY visit IDIOT CAN RUN. BECAUSE SOONER OR LATER, ANY IDIOT IS GOING TO RUN IT.” *Source: PRUDENTIAL INVESTMENTS 0800 072 6159 21
  22. 22. 6 TAX EFFICIENT SAVINGS MAKING YOUR DECISION INDIVIDUAL SAVINGS ACCOUNTS (ISAS) FOR INFORMATION ON PRUDENTIAL’S ISA... These are a tax-effective way to invest in call 0800 072 6159 or visit different assets, including cash, bonds and shares. An ISA lets you buy certain investments and keep any returns you make on them free of income or capital gains tax under current legislation. INDEX-LINKED SAVINGS CERTIFICATES So an ISA is a tax-efficient wrapper, protecting your investment – whether cash, equities, bonds or With index-linked savings certificates from National property – from the taxman. Savings and Investments: the value of your savings is increased in line At the moment you can: with inflation (as long as you keep your invest up to £7,000 in ISAs each tax year as investment for at least a year) with a guaranteed an individual – which means your partner or rate of interest on top – so you can be sure the spouse will have the same allowance returns on your savings will outstrip inflation, and choose whether to invest your entire £7,000 all returns are tax-free – and you can invest allowance in one Maxi ISA, or divide it across up to £15,000 in each issue without affecting two separate Mini ISAs – up to £3,000 in a any other tax-free investments you may have. Mini Cash ISA and up to £4,000 in a Mini Stocks and Shares based ISA. 22 All ISA figures are for tax year 2007/08
  23. 23. 6 MAKING YOUR DECISION TAX EFFICIENT SAVINGS continued PREMIUM BONDS This government-run prize draw offers a fun way to invest. Each premium bond is worth £1 but must be bought in blocks of a minimum of £50 via standing order or £100 by cheque or cash. Each individual ERNIE bond is put into a prize draw and gives you a chance Electronic Random Number Indicator to win a tax-free cash prize randomly decided by Equipment still picks the winning ERNIE, the famous computer. Every eligible bond numbers, although these days he’s a little has a separate and equal chance of winning a prize, bit quicker than he used to be. ERNIE 1 irrespective of where or when it was bought. Best was produced in 1957 and if he was still of all, premium bond prizes are tax-free. in use today, it would take 52 days to You could win a prize each month ranging from £50 complete the draw. In 2004, ERNIE 4 was up to £1 million. The more premium bonds you hold, unveiled and he completes the draw in the better your chances of winning. Even if you under two and a half hours. Today, ERNIE never win a big money prize, you will always at least is the size of a personal computer, but get your money back. And you have much better back in 1957 he was the size of a van. odds with ERNIE than with the National Lottery. Source:, April 2007 PRUDENTIAL INVESTMENTS 0800 072 6159 23
  24. 24. 7 OTHER TYPES OF INVESTMENTS MAKING YOUR DECISION INVEST IN A BUSINESS ALTERNATIVELY, DIG OUT A VAN GOGH Maybe you’ve always dreamed of owning a café or a It may pay you to clear out your attic. Because you florist shop. You could set up in business using your might just find an original painting you’ve forgotten savings. By employing an experienced manager, you about. If you were to find a Van Gogh, here’s how much can work your own hours while benefiting from any it could be worth: US $82.5 million. Since that’s how profits. If you do your research and grow your customer much a Japanese investor allegedly paid for Van Gogh’s base, it could be very rewarding – but to be frank, the ‘Portrait of Dr Gachet’.* risks are variable with no cast-iron guarantee of reward. *Source: BECOME A WINE CONNOISSEUR Some people invest in such things as antiques, rare coins and fine wines. It’s beyond the scope of this guide to tell you which Bordeaux to invest in, but if you know your stuff you could earn a living this way. However, as with all investments, remember that there are risks, including changing tastes, unpredictable markets and even breakages. 24
  25. 25. 8 QUESTIONS TO ASK MAKING YOUR DECISION Here are some key questions to ask before you In addition, you can also do the following: make your final investment decision: Look out for any newspaper articles that have been Is this investment designed to give me income (i.e. written about the investment, or company, you are regular payments) or capital growth (i.e. one lump considering. (Although past performance doesn’t sum at the end of the life of the investment)? mean an investment or company will do well in the future, it could be useful to know about its history.) In what markets, sectors or companies is my money invested? Ask yourself if you are happy with the size, strength and reputation of the company you are buying an Does this investment have any special conditions investment from. – like a fixed investment term? Does it offer any guarantees? What are the risks involved with this type of investment? How and when can I access my money and are there any penalties, hidden charges or costs for this? Are there any tax advantages? That is, can I buy this investment as a part of my ISA allowance? PRUDENTIAL INVESTMENTS 0800 072 6159 25
  26. 26. 8 QUESTIONS TO ASK continued MAKING YOUR DECISION A QUICK RECAP Before you begin investing, make sure your debts are under control and think about having an emergency fund. Then: Assess any existing investments you might have and decide if you’re happy with the balance between their different risk levels or whether you should you think about changing any of them. Decide whether you’re happy with the amount of money you have in deposit accounts. Have you (and your partner or spouse) thought about using your ISA allowance? If you are eligible for Child Benefit, you could consider using it to build a long-term nest egg for your children. 26
  27. 27. 9 WHAT TO DO NOW TAKING ACTION Contact us for help and information about the Some Prudential Pension and Investment products following Prudential products: are only available through Financial Advisers as we believe they require specialist advice. Prudential Unit Trusts A Financial Adviser will assess your individual needs Prudential ISA and circumstances before recommending relevant Prudential With-Profits Bond products (not necessarily from Prudential). Prudential representatives can only provide information on Prudential products. To contact us you can: call 0800 072 6159*between 8am and 6pm, Monday to Friday. visit us 24 hours a day at Existing Prudential customers can: email us via PruMail – our secure email system – if you wish to contact us about an existing policy. Log on to for more information. *Calls may be monitored or recorded for quality and security purposes. 27
  28. 28. NOTES Should you need to make some notes – when you talk to us, for instance – these pages might be just the place. 28
  29. 29. PRUDENTIAL INVESTMENTS 0800 072 6159 29
  30. 30. TECHNICAL TERMS EXPLAINED AND FINALLY Actively managed fund Equities A fund where a team of analysts and portfolio managers This is another name for stocks or shares in a company. aim to pick investments that will outperform the average performance of the stock market. Gilts A gilt is a loan made to the UK government in return for Bonds interest. As an alternative to using your pension fund to buy an annuity at retirement, an ASP offers a form of income Index-linked savings certificates drawdown. A government investment that pays guaranteed interest rates designed to increase the value of the investment in Capital line with inflation. All returns are tax-free. Financial wealth in the form of cash or property. ISA Compounding An ISA (Individual Savings Account) offers a tax-efficient The process by which interest earned on an investment way to invest. It acts as a wrapper in which you can is added back to the original sum invested, thus shelter investments from tax. increasing the capital amount which will then attract further interest in future. 30
  31. 31. AND FINALLY TECHNICAL TERMS EXPLAINED continued OEIC Stocks and shares An open-ended investment fund structured as a In effect, both words mean the same. A share certificate company. Investors buy shares, the number of which confers ownership rights in a company. Ordinary shares varies over time: the share price of the OEIC mirrors (or common stock) give voting rights at company the value of the underlying investments. meetings and allow the holder to benefit from a share of the profits. PEP PEPs (Personal Equity Plans) were tax-efficient investment plans that have been replaced by ISAs. Anyone holding a PEP at 6/4/2000 was allowed to keep it, although no additional contributions can be made. Single price A single price for buying and selling shares, e.g. in an OEIC. PRUDENTIAL INVESTMENTS 0800 072 6159 31
  32. 32. While Prudential uses reasonable efforts to ensure that the information contained in this Pocket Planner is current and accurate at the date of publication, no warranties are made, either expressed or implied, as to the reliability, accuracy or completeness of the information. Prudential accepts no liability for any loss arising directly or indirectly from the use of or action taken in reliance on such information. These documents should not be copied, reproduced or redistributed, in whole or in part. ‘Prudential’ is a trading name of The Prudential Assurance Company Limited. The Prudential Assurance Company Limited is registered in England and Wales. Registered Office at Laurence Pountney Hill, London, EC4R 0HH. Registered number: 15454.