Bond investors & cuts in interest earnings

Investments diversification cushions impact of interest earnings cuts

08:18 15 July 2013

Britain’s premium bond investors should apparently prepare themselves for a drop in their returns as announcements have been made regarding cuts in interest rates for bonds issued by the National Savings and Investments.

Reportedly, accounts that will be affected are NS&I’s Income Bond, paying 1.76 per cent gross will now be paying 1.25 per cent starting mid-September, Direct ISA’s returns which will be shaved from 2.25per cent to 1.75per cent and the Direct Saver which will suffer cuts as well from 1.5per cent to 1.1per cent.

For any saver or investor, balancing the returns and the risks can result in steady and long term gains. Unstable economic conditions influence the returns of each investment type.

One security performs differently from another investment at a particular point in time; therefore, having a mix of investment types could save your entire portfolio from suffering the impact of a drop in some of your investments. Stocks may be down but the stability of the bonds can save the day.

Effective diversification of investments should include a proper mix of the following basic asset types: 

Cash and cash equivalents offers a secured base and can be readily drawn on when needed. Investment in Money market accounts presents very little risk and can be instrumental in keeping a balanced portfolio liquid to some extent. Money market account give outs a return a little bit higher than a savings account.

Fixed Income Securities is an important part of a balanced portfolio. This will include investments in treasuries, municipal bonds and corporate bonds. This could give you a source of cash flow as it protects the total portfolio against any unpredictability.

Equities (stocks) can provide the maximum potential if you are batting for long-term growth and security against price increases.

A word of caution though – any investment carry with it some risk factor, not to mention the likely loss of the principal. Past experiences can never guarantee the same results in the future. One good practice is actively monitoring any movements in the market and making wise choices.