Working out whether fixed-term bonds or a capital-protected FTSE tracker investment is the right option will often depend upon how long money can be locked away. Another consideration is whether someone seeks capital growth or a monthly income.
An Assessment of Fixed-term Bonds
All fixed-term bonds offer an investor a pre-specified rate of interest for locking up capital for a set term. Generally speaking, the longer capital is tied up the better the investment return offered. However, penalties will be incurred for cashing in a fixed-rate bond prematurely.
Those who seek a monthly income from a fixed-rate bond can normally arrange for any interest accrued to be paid directly to a bank account. Fixed-term bonds that offer this monthly income alternative tend to pay a fractionally lower rate of interest to cover administrative costs.
Is it a sensible move to be tied in to a fixed-term bond when interest rates are at an all-time low? With the Bank of England base rate currently standing at 1.5%, most fixed-rate bonds barely keep pace with the rate of inflation.
An Assessment of the Capital-Protected FTSE Tracker
FTSE trackers have been available for a number of years, but a number of people have steered clear of them because of the risk to investor capital. However, it is now possible to invest in a capital-protected FTSE tracker investment, although the minimum term is generally 3 or 5 years.
A capital-protected FTSE 100 tracker allows investors to benefit from growth in the FTSE 100 without the negatives. The worst case scenario is that there isn't any return, but an investor will always get their money back. Investment gains are also capped in return for the investment risk being under-written.
The Capital-Protected FTSE Tracker and Tax-Free Savings
It is possible to put up to £7,200 in a capital-protected FTSE tracker in a stocks and shares ISA. This would allow an investor to achieve the best possible growth performance as well as benefiting from tax-free savings.
Those seeking long-term capital growth should seriously consider a capital-protected FTSE 100 tracker. From a low level, a FTSE tracker has the potential to greatly out-perform fixed-rate bonds. However, fixed-rate bonds may be suitable for investors seeking a monthly income.
Those who found this article useful may find choosing the right life insurance policy of interest. If seeking to remortgage, it is worth discovering whether a fixed-rate or tracker mortgage is the right option.
Asa Ghaffar - Asa has over 10 years of practical experience in loan approval, secured lending, bad credit repair, stock trading and debt management.
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