How to invest

There are two main ways of increasing your cash: saving and investing. This is assuming that you already have an emergency pot.

In saving you are lending cash for example to a bank and they will give you interest. However, they are a business and need to make a profit. Therefore, they borrow your money and lend it out to someone who wants a mortgage, at a higher rate of interest. Therefore, you are not going to make a great return.

If you invest however, you have more say on where your cash is invested. There is the potential to get a higher return, but with it the risk is increased. The most popular way to invest is via a specialist fund manager to actively manage your money for you.

The active fund manager can invest into a range of sectors to diversify risk. They pool your money with other investors like you. The main sectors are fixed income and equities. Fixed income is the same thing as bonds: lending your money out for a fixed period in return for interest. Equities are shares in companies. Also, within these sectors there are many subsectors to again diversify risk. All funds have a theme, where their experts invest across the world.

You could invest into the subsectors yourself but initially it is safer to give an active fund manager the responsibility as they have a supporting team of analysts to invest on your behalf.

Fund managers now use AI to analyse the best companies within their sector to tactically select where to invest.

But remember with investing there is an element of risk, but investing in fixed income is much less risky than equities as the price bounces around less. If you combine different funds with different themes, you can build a strategic portfolio to diversify risk.

The returns you will receive from your portfolio will depend on which themes you chose. The difference between the price you pay and the price you sell for is either a capital gain or loss. Equities pay dividends and fixed income pays interest.

You should never invest more than you can afford to lose, which is why you should always invest into a fund. Share price volatility is normal, however in a capitalist society the markets should bounce back up over time.

Good investing is finding the right mix of different types of investments that match your comfort with risk. This is called ‘asset allocation’, and it’s something you might want to get advice on from a regulated financial adviser, who would normally give you an initial consultation for free.

If you are starting from a lump sum sitting in cash, the middle ground between a savings account and the stock market is where most people begin. What is a bond explains it, and you open an account to buy one through an investment platform.