The Best Way to Invest a Lump Sum

It may seem the stuff of fairytales, but there are in fact lots of reasons why you might receive a cash windfall. After all, an unexpected tax rebate, a work-based bonus or a sudden inheritance could all make a big difference to your finances.
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It may seem the stuff of fairytales, but there are in fact lots of reasons why you might receive a cash windfall.

After all, an unexpected tax rebate, a work-based bonus or a sudden inheritance could all make a big difference to your finances.

However, while it is tempting to go out on a spending spree when you receive a lump sum, investing it for the future is likely to prove much more rewarding.

The difficult part is deciding where to invest the money to ensure that it works as hard as possible for you.

Here, we look at the best ways to invest a lump sum, whether you are putting it aside for your retirement or saving for a big-ticket purchase such as a new car.

Cash

How you should invest your money depends largely on the length of time you can afford to leave it untouched.

The risks involved in stock market investing, for example, mean that it is only suitable for savers with at least a five-year view. This gives some time to ride the stock market ups and downs and reduces the risk of your lump sum losing its value.

Any less than that and the security of cash-based investments is probably a better bet.

And while the Bank of England base rate is now expected to stick at 0.5% for some time, the good news is you can still get some great rates by opting for the top accounts.

For those looking for easy access to their savings, the Santander eSaver has a representative APR of 3.20% (including a 12-month bonus of 2.70 percentage points), can be opened with just £1, and offers unlimited penalty-free withdrawals.

If you are prepared to lock your money away for say two years, meanwhile, you could earn a representative APR of 3.75% with the BM Savings two-year fixed-rate bond.

However, the best way to boost your returns is to shelter your money from tax in a cash ISA such as the easy-access Santander Direct ISA at 3.30% (including a 2.80-point, 12-month bonus) on at least £2,500 or the Halifax five-year ISA Saver Fixed at 4.25% on £500 plus.

Equities

The risks involved in stock market investing mean that if you are not prepared to lose any money, equities are probably not for you. On the other hand, statistics show that the asset class outperforms both cash and bonds over the longer term.

If you want to try your luck, ways into the stock market include buying shares in an individual company such as HSBC or BP.

However, a unit trust investment fund that invests in a range of shares is probably a more sensible choice for novice investors as the all-important investment decisions will be taken by the manager of the fund.

The charges on these funds can be high, though, while there is no guarantee that the manager will outperform the market. If you are concerned about fees eating into your returns, a better option might therefore be an exchange-traded fund (ETF) that tracks the performance of a particular index or sector.

Bonds

Bonds are debt issued by governments and companies. In other words, they allow you to lend to the issuing organisation at a set interest rate. While bonds are generally less volatile than equities, there are risks involved - namely that the bond issuer will default on its repayments.

The bond market can also rise and fall, just like - but not usually in line with - the equity market.

The lack of correlation between the performance of bonds and that of equities does mean that they are often recommended alongside shares, though. As you approach the point at which you want to draw on your savings, advisers also often recommend a move from equities to bonds (and even cash) to avoid the value of your nest egg being decimated by sudden stock market falls.

As with equities, however, novice investors will probably be better off with a bond fund such as M&G Strategic Corporate Bond.

Diversification

However much money you have to invest, you can lower the risk of buying shares and bonds by ensuring that your money is spread across a number of investments rather than concentrated on one company or fund. Sites like Moneysupermarket.com have a range of investment options to choose from.

Unless your timescale means that you should stick with cash, you may therefore want to invest in a range of asset classes - including for example equities, bonds and property - to reduce the chances of suffering big losses.

To make life easier, you could choose a multi-asset fund that invests in a range of regions and asset classes for you.

This post is brought to you with a little help from moneysupermarket.com