First principles of investing

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8. Fixed income products

For some people, inflation proofing is an essential element in their income-generating portfolio of investments. Even if inflation remains comparatively low, the purchasing power of £100 would be just £64 after 15 years of inflation at 3 per cent.

Fixed income products may appear rock solid and can be absolutely right for certain savers. But before you take a punt on interest rates, remember that most experts consistently make errors in their predictions. Fixed income products may have a nasty sting in the tail if interest rates rise and you are locked in to an uncompetitive income for one to five years.

If 'investing for income growth' is a better way of describing your requirements, then you may wish to include some equity investments within your portfolio.

Tax status may be a crucial factor in your choice of savings products. Tax free products may or may not be better than insurance bonds, for example, where tax is deducted within the fund. The bonds take this factor into account and may still offer competitive rates.

Choice of income products:

• National Savings offers a wide range of accounts and bonds designed for every age and tax status. Some have notice periods and penalties.
• NS Savings Certificates can be either fixed rate or index linked and run for 3-5 years. The maximum investment per person is £15,000 per issue.
• NS Pensioner Bonds can be bought by anyone over age 60 and offer a monthly tax-free income guaranteed for five years.
• Cash Individual Savings Accounts (ISAs) You can invest up to £3,600 a year in a tax-free cash mini ISA (increasing to £5,100 for the over 50s from 6 October 2009, and for everyone else from April 2010).
• Gilts and bonds are like an IOU. You lend the money and in return the borrower (companies in the case of corporate bonds and the government in the case of gilts) promises to pay interest and to repay an agreed capital sum at maturity.
• Guaranteed income bonds. These are offered by many insurance companies - usually for a period of one to five years.

1. Five steps to establish your investment goals 2. Your attitude to risk and reward 3. The major asset classes 4. Which type of manager? 5. Your investment assessment kit 6. Is past performance a guide to the future? 7. Easy access deposits for emergencies 8. Fixed income products 9. A rising income 10. The choice of collective equity funds 11. Pensions and ISAs 12. Tax efficient but may be very risky 13. Selecting your shares 14. Your stockbroker 15. Buying your shares 16. Ethical Investment 17. When to sell 18. How to keep your portfolio on track 19. Do you need an adviser? 20. Conclusion

• First Steps in Shares
• How to Read the Financial Pages