Know your risk capacity

When you have sought out the best rates available for your money on deposit, you may be happy to leave it at that. On the other hand, you may feel it is time to be a little more adventurous with some of your capital.

Each individual has a different appetite for risk but financial advisers agree that the most important rule in investing is balance.

Low risk

Gilts: Government bonds are known as gilts and operate as a long-term fixed-interest debt. In other words, gilts are an IOU from the State and this makes them very secure. When you buy gilts, the Government promises to pay you back the full amount on a future date. In the meantime, interest is paid every six months on the investment.

Gilts are bought and sold every day, so, if you have to cash in early, the price you get depends on the market.

Investors can purchase gilts through a stockbroker or a bank on an average commission rate of 0.5 per cent. The commission rate is based on the length of maturity of the gilt.

With-Profit Bonds: Mr Owen Morton of Moneywise Financial Planning agency says that with-profit investments can significantly increase the yield on deposits without a corresponding rise in the underlying risk. With-profit plans are common life assurance products.

They are more stable and secure versions of unit funds because they hold back in the good years so they can continue to pay out bonuses in the bad years. At the end of the investment, there's the prospect of a terminal bonus, but the amount depends on the overall performance of the fund. Hibernian, Canada Life, Friends First, Equitable Life and Scottish Provident offer with-profit policies. The Royal Liver/Guardian Life merger will soon be offering a lump sum with-profit option in the Irish market.

Medium risk

Balanced Unit Funds: These are funds where investors pool their money and it is invested in a wide range of assets such as shares, bonds, property and cash but usually concentrates on shares.

The funds are controlled by investment managers and it is an efficient arrangement that benefits from economies of scale and provides greater security and spreads the risk. The fund is divided into units and the value of each unit is made up of the value of the assets. Many life assurance policies are unit linked. Tracker Bonds: These are hard to place in terms of risk because they guarantee all or most of the capital investment against a background of unstructured growth. Most last from three to six years, with minimum investments of £3,000 to £5,000. Tracker bond fund managers do not focus on individual stocks and shares but seek to mirror the performance of a particular stock market index.

Capital guarantees were one of the main selling points of tracker bonds but, in recent years, they have slipped to 90 per cent or lower.

UCITs: Undertakings for Collective Investments in Transferable Securities are popular because they have provided strong growth in the past. UCITs are governed by European law and are tax efficient, creating greater opportunities for growth. With UCITs, the investor is essentially buying a fund of funds.

Index Tracking Funds: With an index tracking fund, there is no capital guarantee and the fund managers physically buy the equities that make up the index they are tracking. If you had bought into a Nasdaq tracker at the beginning of the year, your fund would be down about 15 per cent.

High risk

Specialist Funds: These are higher-risk funds that invest in a particular sector - often technology - or a specific region or index. The aim is to deliver higher growth by investing in successful areas but there is no guarantee that the fortunes of a particular investment will not be reversed. Shares: Equity funds are considered high risk but the range of investments is good. Individual investors buying shares in a handful of companies are quite vulnerable but, if you put your money into blue-chip companies, you are unlikely to do much worse than the unit fund managers.

Of course, the rewards are potentially high but it is not a good thing to be too exposed to the fortunes of one or two stocks.