First principles of investing

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9. A rising income

Many investors need to squeeze as much income as possible from their savings yet may, at the same time, be reluctant to take any risks with the capital.

The problem with this objective is that inflation eats into the real value of both capital and income.

But if you believe you cannot afford the risk of ordinary shares it may be worth considering a halfway house - that is, investments which offer some capital protection and a rising income.

Your choice of rising income products:

• Index-linked gilts are issued by the government and guarantee to increase in line with the retail prices index (RPI) both the six-monthly interest payments and the 'nominal', or original capital, investment which is returned to you on the redemption date.
• Corporate index-linked bonds work in a similar way to index-linked gilts, paying interest twice a year which, along with the original capital investment, is linked to RPI. The coupon or interest rate is higher than for gilts to compensate for the higher risk in lending to companies rather than the government.
• Escalator bonds are available from certain building societies and share some of the characteristics of gilts. They pay a pre-determined rate of interest for the first year and then increase that rate by a fixed amount for subsequent years.
• Stepped preference shares of split capital investment trusts. 'Stepped prefs' offer an income which the investment trust guarantees will rise each year at a fixed rate, and a fixed redemption price for the shares when the investment trust is wound up.
• Purchased life annuities sold by insurance companies, guaranteed to pay a regular income for life in return for a lump sum investment.

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