With Profit Funds

These funds are marketed by life assurance companies usually in the form of endowment policies or investment bonds. A with-profit investment can offer a ‘half-way' house alternative to a generally cautious investor who wants the returns that a mixed portfolio of investments can bring, but at the same minimising the downside risk. The investor's money is ‘pooled' with others in the fund and the return comes from the payment of ‘bonuses' calculated each year by the actuaries. Bonuses generally come in two forms – annual or reversionary and terminal. Annual bonuses are declared each year and may be thought of as ‘income received'. The terminal bonus is paid at the end of a specified period (usually ten years in the case of an investment bond) and represents a share of investment returns actually achieved over that period. Thus the overall investment returns are ‘smoothed' or averaged and provide a less volatile environment for the more cautious investor. It must be emphasised however that there are risks attached to any kind of investment and with-profits is not synonymous with ‘risk-free'.

 

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