Action plan for mice and men

Want better returns than you get from your reliable savings account? Here and on pages 18 to 19 we look at ways to make your money go further, from unit and investment trusts to a flutter on the nags

As people in some ostrich investment schemes have realised, it is better not to have all your eggs in one basket when it comes to investing for capital growth.

There is no single investment which guarantees to produce optimum returns from your money while entailing very little risk. The best way to maximise growth while limiting risk to your cash is to set up a properly structured portfolio of investments.

Unless you are an experienced investor, you should consider asking an independent financial adviser for help. Chris Wicks, of Manchester-based accountant Kidsons Impey Scott Lang, says he would ask the investor some crucial questions:

How long do you want to invest your money?

How much risk do you want to take?

What is your tax status?

Do you have any preferences as to where your money is invested?

The most difficult question to answer is that of risk. Mr Wicks says there are two main types of risk - stock-market risk which occurs when an investor has to encash his investments when the stock market has gone down, and inflationary risk, when the growth in your money is exceeded by inflation.

Most people are more nervous of stock-market risk, but over the long term equities have produced the best returns. By leaving your money in the building society you face another risk: that of inflation. Although the rate of inflation is currently very low, so are interest rates on most deposit accounts, and if you intend to withdraw interest your capital will erode in value over time.

Most investors should aim to put their money in a balanced portfolio which provides a spread of investments, each entailing different levels of risk and potential returns. This will provide a balance between flexibility, so that you can cash in at relatively short notice without the risk of major loss, and investment returns.

Paul Boni, of independent financial adviser Berry Birch & Noble, says that as Britain may go through a change of government next year, investors could also face the risk of increased taxation. They should therefore make the most of tax-free options (Tax-Exempt Special Savings Accunts, Personal Equity Plans and National Savings).

Mr Wicks and Mr Boni have suggested the following ideas for low-risk, medium-risk and high-risk portfolios. In all cases, investors should deposit some money in a bank or building society account. This provides a safety net should you need money in a hurry.

Low risk

Risk-averse investors should consider putting up to one quarter of their savings into a cash deposit and investing the maximum possible amount - pounds 10,000 per person in each issue - in National Savings certificates. Tessas are also worth considering.

Mr Wicks says the remaining money should be invested in share-based investment funds. These will enable the investor to buy into a much wider spread of shares than he could afford to buy directly, helping to dilute the risk of one or two shares performing badly.

Mr Boni says risk-averse investors could consider guaranteed PEPs that promise to return the original investment plus some growth on a set date. He also likes zero-dividend preference shares, issued as part of split- capital investment trusts. As their name suggests, zeros yield no dividends but pay out a pre-determined amount of capital when the trust is wound up.

Medium risk

Again investors should take advantage of Tessas, PEPs and National Savings. But those who are prepared to take an average amount of risk could invest some of their money abroad. Buying shares overseas in the local currency exposes your investment to higher risk. As the local currency moves against sterling, the value of the investment changes, regardless of how the stock market performs.

To limit this risk, it is a good idea to spread your money around different markets. Mr Wicks says that a medium-risk portfolio might have 40 per cent in the UK, 15 per cent in Europe, 10 per cent in Japan, 10 per cent in the Far East and the rest in fixed-interest and cash deposits.

The easiest way to place money in overseas stock markets is through funds such as unit and investment trusts. Mr Boni suggests tracker funds, which emulate the performance of a particular stock market index by replicating the composition of the stock market. Alternatively he suggests a broad- based managed fund.

High risk

Investors with less than pounds 50,000 to tuck away should stick to unit and investment trusts. If you are aiming for above-average capital growth and are prepared to accept the risks involved, you may be attracted by the emerging markets of Latin America, eastern Europe, or Asia.

Mr Wicks suggests a smaller proportion of money in the UK, perhaps 20 per cent to 30 per cent, 20 per cent in Europe, 20 per cent in Japan, 15 per cent in the Far East, 10 per cent in emerging markets and the remainder in cash. Those with more than pounds 50,000 could consider buying directly into UK shares, but this will increase risk. Shareholders should use their annual PEP allowance each year to "bed and PEP" their shares into self- select and single-company PEPs. This will protect any future dividends and share price increases from tax.

He also recommends selective investment in venture capital trusts and enterprise investment schemes, which allow you to invest up to pounds 100,000 a year in new and developing companies. VCTs and EISs enable people who have made significant capital gains elsewhere to roll over those gains into the EIS or VCT, delaying the payment of capital gains tax for the duration of the investment. The investor still has to pay the original CGT bill when he encashes his investment, but he does not have to pay tax on gains made with that money.