Low risk with guaranteed interest

I wish to invest a sum of money for five-ten years. I am not an adventurous investor, but instead prefer to invest my money in fixed deposits. As interest rates are so low, I am not seeing any "real rate of return" and am seeking an alternative cautious investment, which would outperform deposit accounts. I do not require to draw an immediate income, although I may wish to take the interest in two-three years' time when I reach state retirement age.

As we get older, it is natural to look for extra protection in one's investment portfolio. One of the first rules of investing is that you risk what you can afford to lose. What you cannot afford to lose you do not put at risk.

As you are approaching retirement age, I would generally recommend that 70-80 per cent of your investment assets are invested in a secure and cautious manner, including of course cash. The actual amounts will depend on your personal circumstances, including income requirements.

After allocating a sensible amount to cash, you should look to fixed interest securities, capital protected products and investments that lock in growth.

One investment often overlooked is the traditional With Profits Bond - one of the oldest forms of investment and provided by all the major UK and offshore life assurance offices. The principle of the With Profits Bond is to provide a steady rate of return, higher than deposit accounts. Another very important feature is that their value can only go up, hence an 'inbuilt' guarantee applies.

They pay not one, but two elements of interest or 'bonus'. The first is a reversionary bonus. Rather than being based on current or short-term interest rates, the issuing life assurance offices base their current declared rate of bonus on long-term interest rates, for example ten-year assumptions. The rates do not therefore fluctuate violently and investors see a steady, smooth return.

Even in times of low interest rates of today, reversionary bonuses are currently around five per cent. Some companies even offer first year guarantees of up to ten per cent. The bonus is added to the capital sum invested on a daily basis so your investment is growing not annually, but daily.

One very important factor regarding the reversionary bonus is that once added, it cannot be taken away. You therefore see a steady increase in the value of your fund.

The second element of 'bonus' is the terminal bonus. Normally this is added on at the end of the bond's life, i.e. when you decide to encash it or when the policyholder dies. This second bonus can make a substantial difference to the final payout.

The combination of reversionary and terminal bonuses offers investors a steady return where the value can only go up. For cautious investors, this is a very good solution in times of low interest rates and volatile stockmarkets.

Please address any financial questions to: Mark Hollingsworth, c/o The Sunday Times, PO Box 328, Valletta CMR01. Alternatively, he can be contacted on 2131-1121/9984-2614 (office hours).

Past performance is no guide to the future and except where amounts are guaranteed the price of your investments (and the currency in which it is denominated) may fall as well as rise. Malta Exchange Control Regulations must be observed. Your personal tax situation will depend upon residence, always consult a professional adviser. This article does not intend to give investment advice and the contents therin should not be construed as such. Readers are encouraged to seek professional advice regarding their personal financial situation.