Investing basics

Cash carries the lowest risk and can be useful as it provides good diversification to riskier investments. You may decide to hold some cash in the few years before you want to access your savings to help preserve their value.

Depending on the investment options available on your Plan, you may be able to hold cash through a cash fund. This is an investment fund, not a bank account, and it will invest in short-term deposits across a number of financial institutions.

Benefits of cash funds:

• Low level of investment risk
• Diversification against higher-risk investments

Some things to consider:

• Cash funds can fall in value, so you may get back less than you invest
• The potential for capital growth is limited
• Inflation can reduce the real value of your money

Bonds are loans where the investor lends money to a company or government in return for a fixed rate of interest over a set period and the repayment of the principal at the end of that period. Bonds are often referred to as ‘fixed income’ investments. Depending on the investment options available on your Plan, you may be able to hold bonds through a bond fund.

A bond fund will hold a range of bonds and perhaps some other types of debt. Many funds concentrate on specific types of bonds – for example, bonds issued by companies in a certain geography with good credit ratings.

You may think about moving your money into bond funds as you get closer to the time when you want to access your savings. This may help to preserve their value.

Benefits of bond funds:

• Lower risk than equity funds
• More potential for growth than cash funds
• Diversification against other types of investment

Some things to consider:

• While considered lower risk, bond funds can go down in value, so you may get back less than you invest
• Bond funds typically offer lower growth potential than equity funds
• Due to the greater possibility of default, an investment in a corporate bond is generally less secure than an investment in government bonds
• Rising interest rates may cause the value of your investment to fall

When you buy a share in a company, you become one of its owners; you have ‘equity’ in it. Your investment return depends on the success or failure of the company. If its value goes up, so will the value of your shares. In addition, the company may pay its shareholders an income known as a ‘dividend.’ Depending on the investment options available on your Plan, you may be able to hold equities through an equity fund.

An equity fund buys a range of company shares. Some funds focus on a particular region, such as the UK, US or Europe, while others concentrate on companies with a specific size or in a certain industry sector.

You may want to invest in an equity fund if you are aiming for long-term growth. You must be willing to accept that the value of your investments could go down as well as up, particularly in the short term.

Benefits of equity funds include:

• Greater potential for long-term growth than bond or cash funds.
• Opportunities for diversification, due to variety of markets, regions and sectors.

Some things to consider:

• Equities involve more risk than other types of investment, so the value of your investment may be volatile, particularly in the short term.
• Equity prices can go down as well as up, so you may get back less than you invest.

If you own your own home either to live in or to rent out, you are already a property investor. Depending on the investment options available on your Plan, you may also be able to invest in property through a property fund.

Most property funds buy commercial buildings such as offices, factories, warehouses and retail space, rather than residential property, and they may benefit from being able to invest in large projects that would be out of reach for most individuals. A fund should also receive rents from the properties it owns.

You might think about investing in a property fund if you are interested in long-term growth and there is a long time until you need to access the money.

Benefits of property funds:

• Opportunity to invest in properties that you could not afford on your own
• Property ownership without the responsibilities of maintenance and letting
• Potential for long-term growth if property prices rise and rents are paid
• Diversification potential, as property markets can behave differently from other types of investment

Some things to consider:

• Property prices may fall, or there may be problems with rent payments, in which case you could get back less than you invest
• It can take a long time to sell properties, so trading in property funds can be suspended if lots of investors want to redeem their holdings. This could lead to a delay if you want to withdraw your money from a property fund
• If you already own property, investing in a property fund through your pension could increase your overall financial exposure to the property market

Commodities are raw materials that are either consumed directly, such as food, or used as building blocks to create other products.