An investment trust is a listed company that has shares on the London Stock Exchange. They will invest in the shares of other companies or possibly in fixed-interest securities, unquoted securities or property.

Unit trusts are a form of collective investment in which the shareholders money is combined and then invested.

Investment units and trusts are open-ended funds so the size and value is known to vary. By using these you can invest in a number of shares and therefore reduce the risk.

Fixed interest securities

Fixed interest securities generally offer the investor an agreed interest rate that pays out at regular intervals. They are viewed as a safer investment option and include, among others, bank accounts, bonds and gilts. Any interest received can be paid in various ways, for example: at regular intervals throughout the investment, as a lump sum at the end of the investment or calculated at regulated periods and added onto the invested sum; this is know as compound interest.

The main risk involved with fixed interest securities is fluctuations in interest rates. In simple terms interest rate risk is the risk an investors portfolio is exposed to due to uncertainty in future interest rates. For example bonds, which are regarded as fixed interest securities, are highly susceptible to changes in interest rate. If the interest rate rises then the value of the bond will fall sharply. Similarly companies with high gearing, which is based on how much of the company is funded by debt, will also be highly susceptible to interest rates.

Advantages of fixed interest securities

Unlike equities the income of fixed interest rates investments is pre-determined. The investor’s right to receive this interest plus the final return can be traded on the stock market. Additionally, unlike deposit accounts the return on fixed interest securities will be higher because there is slightly more risk involved.

Gilts are regarded as a fixed interest security and are often seen as the safest form of investment because they are issued by the government, who has never failed to make the principle payments. Similarly corporate bonds are also seen as a relatively safe investment. Fixed interest security investments are therefore attractive to investors who are looking for a guaranteed income or whose pension plan is coming close to maturity.

Using fixed interest securities within a sipp can be a great opportunity to stabalise a sipp that is invested in less secure alternative investments.

Alternative investments

Although it is tempting to use a sipp for safe investments such as fixed interest securities, considering slightly risky, alternatively investments can give offer investors an opportunity for higher returns. Using alternative investments alongside a traditional portfolio can be highly beneficial. Working closely with an advisor who can offer expert knowledge rather than going it alone will allow investors to take full advantage of the investment options available.

Properly managed, other funds that could be open to investors include, but are not limited by,: Currency funds, carbon offsetting, overseas property resorts, traded endowment funds and many other specialised green investments that are now suitable for investment within a sipp.