Pay your money and take your chances

A lottery win, an inheritance, a compensation award, a work bonus or a smart investment can throw up a nice lump sum and with it the dilemma of what to do with all the cash.

Pay off the mortgage? Boost your pension? Help inflate the Republic's retail sales figures? Then there's the array of investment products such as tracker bonds and property funds, sold on the premise that they are the perfect home for a lump sum.

For someone with a windfall of €20,000-€50,000 that they want to invest, the options on offer can be confusing. As most people don't know how to make money work for them, the services of an independent financial adviser should ideally be employed.

Lump-sum holders should also do their own financial health check before they start investing.

Clearing debts, particularly unsecured debt, is a wise first move, according to Ian Mitchell, managing director of Deloitte Pensions & Investments. The financial benefits of making a single one-off mortgage repayment should always be examined, he adds.

If consumers haven't already set up a rainy-day fund, then some or all of their windfall should be used to establish one.

"It is prudent for all individuals to carry a reserve cash fund totalling the equivalent of approximately four to six months' income," says Mitchell. This emergency savings pot should be easily accessible.

Once a dent has been made in the mortgage and there is a financial security blanket in place, people left holding a five-figure lump sum will need to decide if they are looking for a low-risk, medium-risk or high-risk (and potentially high return) investment.

Risk-averse clients will keep all of their money in a cash deposit such as a one-year rolling bond with their bank, says Mitchell.

"Another possibility would be to invest in one of the guaranteed funds offered by a life insurance company. The aim of these funds is to outperform Irish inflation, whilst still providing a capital guarantee after five years."

John Cronin, head of investment bonds at Dolmen Stockbrokers, recommends Hibernian Life's Guaranteed Fund, which has a minimum investment requirement of €6,000.

"It spreads the eggs nicely with 33 per cent in bonds, 33 per cent in equities and 33 per cent in property," says Cronin.

"Unlike tracker bonds, where you are locked in for five or six years, this fund is less restrictive. You have a capital guarantee after five years but you can come out earlier."

Investors should always try to minimise costs by negotiating the commission levels with their broker, according to Mitchell.

"You must also be sure that you will not need to touch this money for at least five years, as early encashment often costs money."

Moving up into riskier but possibly more rewarding territory, investors might consider the New Ireland UK-geared property fund, which comes recommended by both Cronin and "Money Doctor" John Lowe of Providence Finance Services.

The fund, which has a €30,000 minimum investment requirement and a term of five to seven years, is due to close at the end of March. It opened last year, when it delivered a 21 per cent return.

The money has been used to purchase eight properties, all on long leases, meaning there is tenant security, notes Cronin, while Lowe believes the fund will benefit from a buoyant UK commercial property market.

But, as a geared fund where two-thirds of the purchase price of the properties is financed through sterling loans, the fund is not risk-free.

"Investors would want to have assets in other places. I wouldn't recommend that someone puts their only €30,000 in it," says Cronin.

Another type of fund to use the property banner to attract customers is AIB Investment Managers' (AIBIM's) new European Property Stocks Fund, which has a minimum investment requirement of €10,000. Rather than actually using investors' cash to buy properties, the fund is a pooled investment in property companies listed on the European Property Real Estate Association (EPRA) index.

According to Caroline O'Shea, head of the property team at AIBIM, the fund is an opportunity to obtain exposure to European property markets without incurring the traditional disadvantages of illiquidity and high entry and exit costs.

Not everyone is convinced. "I'd be a bit wary of property shares to be honest," says Cronin, who prefers more direct investment in bricks and mortar.

"Although they have had a good run, they performed badly in the late 1990s. At a time when the UK property market was very strong, shares in property companies were trading at a discount to the value of the assets."

Lowe also recommends Canada Life's Dividend Bond to the medium-risk investor.

Unlike typical tracker bonds, this product does not offer investors the safety net of a capital guarantee, but this should only bother the most risk-averse investors.

"You can get trackers that will guarantee, but they are two-faced. You can virtually be assured that there will be very little growth and there are some trackers where you will lose money," says Lowe.

Tracker bonds typically promise investors the return - or a percentage of the return - of an index, series of indices or a basket of shares, but one major drawback for investors is that they won't see any of the dividend yields.

Identifying the gap in the market, Canada Life set up its Dividend Bond in 2003, giving investors with a minimum of €10,000 access to a portfolio of 35-40 blue-chip companies. Under the bond, there is an option to receive dividends on a half-yearly basis or re-invest the proceeds back into the bond.

According to Lowe, the bond is ideal for someone seeking an income.

Investors should discuss medium-risk products in depth with their broker and remember to negotiate on costs, Mitchell advises.

They should also be prepared to invest for a minimum of five years, "preferably longer", and be aware that the timing of their withdrawal could be affected by fluctuating fund values.

Investors should also look at making additional voluntary contributions into their pension, or make a lump sum contribution to a Personal Retirement Savings Account or personal pension if they are self-employed.

"These options tie up your funds until retirement time but do have the benefit of attracting tax relief at your marginal rate," he says.

High-risk funds are usually 100 per cent invested in equities. Again, expert advice should be obtained before taking the plunge. They should also be seen as long-term investments of eight years or more, says Mitchell.

One such fund recommended by Cronin is the Fidelity Special Situations fund, which has a minimum investment of €20,000. Sold through Irish Life, the fund is run by UK-based investment manager Anthony Bolton.

"His track record is second to none. He invests in some blue-chips but mainly in small- to mid-size companies that he feels are undervalued," Cronin says.

Again, investors should remember not to spend their last €20,000 in this type of fund.

"What we would recommend is a balanced approach," he says.

Fully exposed to the vagaries of the stock market, investors could, in theory, lose every cent of their money and leave themselves back where they started.