Investment Bonds

Investment bonds are sold by life companies. They permit investment in a variety of investment funds managed by professional fund managers. They are normally designed to produce long term capital growth, but can also generate an income. The minimum investment is typically between 5,000 to 10,000. When you purchase a bond you will be allocated a number of units in the fund/s of your choice. Each fund will hold a portfolio of investments, such as stocks or fixed income securities, and the price of your units will fluctuate in line with the value of these investments. Strictly, investment bonds are single premium life insurance policies. This means an element of life insurance is provided, but typically adding only an extra 1 per cent or less to the value of your investment, if it is paid out after your death.

Previously, investment bonds provided a choice of around half a dozen "unit linked" funds covering different types of investments - UK and/or overseas equities, commercial property, fixed interest securities and cash. Investors could choose a combination of funds and switch between them a several times a year free of charge, or they could opt for a managed fund which included a combination of different investments such as equities, bonds, cash and property.

During the 1990s, "with profits" investment bonds started to become popular. Like managed funds, "with profits" funds invest in a basket of investments, but the way the gains and losses on these investments are passed on to investors differs. Returns are distributed through bonuses calculated by the insurance company. The aim of "with profits" bonds was to smooth out the returns so that investors did not suffer the fluctuations that occur when investing in the stockmarket. However, after the stockmarket downturn between 2000 and 2003, many insurance companies had to cut their bonuses dramatically, investors lost money and with profits bonds fell from favour. Investment bonds linked to distribution funds which are geared to producing a regular income by investing in equities and bonds and sometimes property have become more popular in recent years. These bonds can fluctuate in value, but many have a good record for producing a steady income. However, due to the relatively poor past performance of unit linked funds generally and with profits funds in particular, many investment bonds nowadays tend to offer investors access to funds which invest in a wide range of top performing unit trusts. A portfolio of these funds can be held in a bond and switches made between them when required.

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