How to play it safe with your euro -- and still make a buck
Happy to stick with euro after the latest European deal? Louise McBride wonders which investments could be worth a punt
Published 31/07/2011 | 05:00
THE latest European deal, which slashed the interest rate on the bailout loan for Ireland and secured a second bailout for Greece, calmed some fears about the future of the euro. The spectre of an Irish default also appears to have been laid to rest.
But before that deal was agreed, uncertainty around the euro prompted many to move savings into foreign currency investments and accounts. This may no longer be the route to take, particularly if you are a cautious investor.
"I would not recommend moving into a foreign currency at all if you are a low-risk investor or are primarily interested in protecting any money you invest," said Vincent Digby, founder of the financial advisers Impartial and a former head of funding with BoI Global Markets.
"Currency movements have been extreme this year and you could lose 10 to 15 per cent if you put your money into a different currency."
David Ryan, head of fixed income with Setanta Asset Management agrees.
"When moving out of euro, you need to be very cognisant of the currency risk you are taking," he said. "A currency move could wipe out part of your capital and any income you are gaining on foreign assets."
With the ink barely dry on the European deal, and much of the debt crisis yet to be resolved, it still pays to be cautious with any cash you have to invest. If the recent deal has persuaded you to keep your money in euro, but you are loathe to take any investment risk with it, what investments could be worth considering? The Sunday Independent asked some wealth managers for their tuppence worth.
Investec Emerging Markets Dual Deposit
Gary Hanrahan, managing director of the financial advisers Capital Options, recommends Investec's Emerging Markets Dual Deposit account. You need at least €20,000 to invest in this product. However, to ensure you get back what you invested in the account (as well as any investment return) you must tie up most of your money for three years and nine months.
As its name suggests, the Dual Deposit Account splits your money between two accounts. About a fifth of your money is held in a one-year deposit account which pays eight per cent interest a year. You can withdraw this part of your investment (a fifth of what you initially invested, plus the interest earned on the one-year deposit account) after one year. You must pay 27 per cent Dirt tax on the interest earned on this part of your investment.
The rest of your money (four-fifths of your original investment) is held in an investment account for three years and nine months. The interest earned on this account is linked to the performance of an emerging markets stock market index -- a group of stocks from countries such as the BRICs (Brazil, Russian, India and China).
Like all stocks and shares, there is no guarantee that this index will do well, so there is no guarantee you will make an investment return on the money in your investment account.
However, as long as you leave the money in the investment account for three years and nine months, you will, at the very least, get back what you initially invested.
You should not invest your money in this product if you cannot afford to tie up most of it for three months and nine years. Remember, too, that as the interest earned on most of your money is linked to a stock market index, if that index performs badly, you could have earned more interest had you left your savings in an ordinary deposit account.
This product is covered by Britain's Financial Services Compensation Scheme, which protects deposits of up to €100,000 per person should the firm that holds your savings go bust.
KBC Secure Income Plus Account Series 3
Vincent Digby of Impartial recommends KBC's Secure Income Plus Account Series 3 as a low-risk investment product. You need at least €25,000 to invest in this product and you must be able to tie all that money up for five years. As long as you can do that, you will not lose any of the money you initially invested, and you could make an investment return of between 4.74 and 5.24 per cent (before tax) a year.
"This product has no catches and does not have too much fees," said Digby. "It is also covered by the Irish Deposit Guarantee Scheme." Under that scheme, if you hold up to €100,000 of savings with a financial institution, your savings are protected should that financial institution go bust.
New Ireland Secure Advantage 18
Another product recommended by Hanrahan is the New Ireland Secure Advantage 18 fund. You need at least €10,000 to invest in this fund. There is a full capital guarantee on this fund -- but only if you can tie up half of whatever you invest in it for four years and 11 months.
With this product, half of your money is invested in a one-year fixed-rate fund that makes a six per cent return (before life assurance tax). You receive the money invested in the one-year fixed-rate fund back, as well as the interest earned, after one year. The other half of your money is put into a separate fund (called Secure Advantage 18) and any return made on this money depends on the performance of five stockmarket indices.
There is no guarantee that these indices will deliver an investment return for you. You must leave the money put into the Secure Advantage 18 fund for four years and 11 months, otherwise, you could lose some of the money initially invested in this fund.
Remember, as this is a life assurance product, it is not covered by the Irish Deposit Guarantee Scheme.
David Ryan of Setanta Asset Management recommends short-dated government bond funds, liquidity funds and enhanced cash funds as low-risk bets that are "good alternatives to standalone deposit accounts".
Most banks, including Rabobank and Investec, offer liquidity funds. Enhanced cash funds are available from Barclays, Blackrock and Pimco.
Digby believes that short-dated German government bonds are a good investment for those investors still worried about the banks and the debt problems in Europe. "At about 1.1 or 1.2 per cent, you don't earn much interest on short-dated German government bonds, but they're one of the most secure investments," he said.
Rory Gillen, founder of the investment website, www.investrcentre.com, says you should keep your money on deposit with Irish banks if you're looking for a secure investment which pays a good return.
"The banks have been recapitalised and continue to pay high interest rates that are well above ECB rates," said Gillen. "Insurance company cash products have huge costs and should be avoided as should guaranteed structured products as most of the time income is surrendered for little or no eventual upside."
For example, if you can save at least €10,000 for a year with Permanent TSB, its Interest First Savings account pays 4.1 per cent interest. EBS's 18-month Fixed Return Savings account pays 4.29 per cent interest a year on lump sum savings of between €3,000 and €500,000 -- as long as you leave your money there for a year-and-a-half. If you can save at least €10,000 with KBC for three years, you'll earn 4.46 per cent interest a year on its three-year fixed term account.
Most Irish banks are covered by the Deposit Protection Scheme.
You could also consider State savings such as the savings cert, where you'll earn 3.53 per cent interest a year tax-free after five-and-a-half years. (The equivalent interest rate on a deposit account on which you pay tax would be about 4.8 per cent).
The State's National Solidarity Bond pays 4.14 per cent interest a year -- which adds up to a return of about 47 per cent after 10 years. You can open the savings cert or National Solidarity Bond through An Post.
Your savings are guaranteed by the State.
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