If you are lucky enough to have a bit of spare cash, your initial inclination may well be to open a savings account at your bank. However, despite this being traditionally the most popular option, there is an increasing move away from this choice. With the cost of living climbing, interest rates have remained at rock bottom. This has left savers getting only a very small return on their money and certainly below the rate of inflation. What this means is that the nest egg you might be carefully squirreling away is actually dropping in value in real terms as it is not growing quickly enough to keep up with the rising cost of living.
For this reason, savers are considering other investment vehicles for their cash where the potential for returns is more akin to what they would hope to receive. Investing in retail bonds is certainly one possibility, enabling individuals to control the degree of risk to which they are willing to be exposed.
Retail bonds are a way of loaning a company money and receiving a regular payment of interest while they are holding your cash. At the end of the agreed period, your money is returned. Companies that pay higher rates of interest are usually considered to be a greater risk, whilst large multinationals such as Tesco pay a lower return but your cash will be safer. The balance between the interest you receive and the risk you are willing to accept is entirely your decision. Some people have portfolios with several retail bonds that hold different degrees of risk and return.
If you haven’t come across retail bonds before, here is a snapshot of the pros and cons.
Advantages
The rate of return even for companies deemed as very low risk is usually far superior to the majority of bank accounts.
With the interest earned you can ensure that your cash outstrips the rate of inflation, meaning that even in real terms you can end up richer. You can decide how much risk you want to take. Your money will be returned to you at the end of the agreed period. You will receive either an annual or six-monthly income from your investment.
Disadvantages
There is a risk the company might go bust and you won’t get your cash back. This risk is obviously lower with larger, more secure companies.
Your investment will not be covered by the Financial Services Compensation Scheme, unlike with a bank account. Therefore, if the company went out of business, you would have no guarantees of getting your investment paid back.
You will need to keep your money invested for the agreed period. It is possible to sell the bond to a broker earlier, but the chances are you will lose a substantial sum.
Retail bonds aren’t appropriate for everyone, but if you have some cash that you can invest and leave untouched for a period of time, it might be worth considering in order to ensure your money at least keeps pace with the rate of inflation.
Samantha Wood is a veteran finance and investment writer, but a small part of her is still banking on winning the Lottery. Samantha believes that investing in Retail Bonds should be considered by any saver who is struggling with low interest rates.