Changing investment landscape throws up investor-friendly funds
MOST readers of this column possess the financial knowledge and skill set to buy and manage their own holding of equities, bonds and so on. There are others who may not have the necessary skill set or time to do this.
Exchange Traded Funds (ETFs — essentially funds which track the performance of a bunch of stock) provide a low-cost option which can also facilitate diversification.
Diversification — where you invest your money across different types of investments — is important, as it helps to reduce investment risk. However, the tax treatment of ETFs is complex and can prove to be challenging and difficult to manage.
Another low-cost option is a collective investment such as a unit-linked investment bond fund. The advantage of such an investment is that it provides diversification and is more straightforward from a tax perspective. Exit tax (which stands at 41pc) is deducted at source by the provider.
In addition, unit-linked investment bond funds can benefit from gross roll-up if untouched for up to eight years, unlike deposits where Dirt (Deposit Interest Retention Tax) is deducted at source annually.
With gross roll-up, you have the benefit of reinvesting the annual return made on a fund or policy for eight years — rather than paying tax on those returns each year. You still have to pay exit tax on your return when you cash in your fund.
Over the years, there have been two drawbacks for investors in unit-linked investment bond funds: high annual management charges and exit charges (where the investor may have had to tie up their funds for a number of years).
The landscape has been transformed over recent years within this space. The providers of unit-linked investment bond funds have listened to investors’ demands and have responded in a positive and progressive manner.
The investor can now buy a product with an easy-to-manage exit tax structure and have access to funds with low annual management charges, which are close to the pricing structure of ETFs. Investors can also maintain full liquidity which allows for greater flexibility.
Depending on the contract selected, each provider will allow access to a large and diverse array of funds. Each fund has a corresponding risk rating. Many providers use ESMA (European Securities and Markets Authority) risk rating, which ranges from one to seven. An investment with a rating of one (such as cash) is the least risky. An investment with a rating of seven (such as emerging market equities) is the most risky.
Multi-asset funds such as Irish Life MAPS range are also available with most providers and are increasing in popularity. The ability to access a broad range of assets within a single fund allows the investor to spread their risk through diversification within the same fund.
When choosing a fund, investors should take comparative historical fund performance (net of annual management charges) between the various providers for similar type funds into consideration.
Unit-linked investment bond funds are a suitable solution for private individuals as well as companies with surplus funds on their balance sheet.
As they have a life assurance wrapper, they are classified as a life assurance product and therefore are subject to the 1pc Government levy. Other charges may also apply depending on the individual policy contract. Minimum and maximum investment amounts will apply — along with certain age restrictions.