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The Alternatives To With Profits |
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Distribution Fund Bonds
Distribution Fund BondsDistribution funds are structured so that capital growth and income can be separated from each other. In most cases, a significant part of the portfolio is invested in fixed interest stocks (corporate bonds, gilts etc.) to provide the underlying income. The other main investment is in usually income-bearing equities to provide further income and give capital growth potential. Distribution fund bonds are typically used by investors seeking income. However, as income can be reinvested, they can also be suitable for investors looking for growth on a total return basis.
The investment approach between a Distribution fund and a With-Profits fund is fairly similar in that they each invest the majority of their fund in equities (usually between 40% - 60%) and fixed interest investments. Saying that, there are some major differences, which need to be recognised:
The unit price of a distribution fund fluctuates as the value of the underlying investments fluctuate, whereas a With Profit fund will attempt to smooth out these underlying fluctuations. The result of this is that the workings of a distribution fund are more transparent than those of a With Profit fund.
The unit price of a With Profit fund will only move upwards and this is the result of the smoothing process. Whereas the unit price of a distribution fund can fall as well as rise as the underlying investments fall or rise.
To compensate for the additional risk of a distribution fund (i.e. it can fall) there is additional growth potential if equities perform well, as these bonds will immediately benefit from the full equity growth in the fund.
Unit Linked Bonds
With unit-linked policies, the investment amount buys units in the fund of the investor’s choice. Unit-linked funds may be run by the life company itself or the life company may have links with other life company and/or investment company funds.
The value of a policy is measured by the value of the units allocated to it.This will be dependent on the performance of the fund or funds to which the policy is linked.
Unit-linked investment bonds are now becoming recognised as a viable alternative to with-profits bonds. Unlike with-profits, unit-linked investment bonds have not suffered from a barrage of negative media publicity, and they are seen as transparent, with all exit fees and management costs clearly shown up front.
Unit-linked investment bonds show exit fees and management costs up front, and offer multi-manager options with investment flexibility.
Unlike with-profits, unit-linked investment bonds allow investors and their advisers to asset allocate, so that investors can switch as their objectives change over time.
Capital Protected Investment Bond
The Capital Protected Investment Bond is a single premium investment bond. It aims to deliver steadier, more consistent performance than a with-profit policy and has the added peace of mind of an element of capital protection. The bond should be considered a medium to long term investment i.e 5 to 10 years.
The protected investment bond aims to balance risk and return through the ability to constantly adjust the global mix of investments available - including property, commodities, equities, bonds and cash - dependent on market conditions. This means that if, for example, equities are underperforming, a proportion of funds may be switched into property, a class of asset that isn't directly affected by stock market performance.
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