Savings & Investments
Core concepts
Candidates must know the main asset classes (cash, bonds/gilts, equities, property), the risk/return relationship, and the concept of diversification. Understand collective investments (unit trusts, OEICs, investment trusts), ISAs, and the difference between income and accumulation units. Grasp yield, capital growth, total return, and the effect of inflation on real returns. Know the roles of the FCA and the FSCS protection limits.
Traps
Investment trusts are companies (closed-ended, can trade at a discount/premium); unit trusts and OEICs are open-ended. Questions often confuse nominal and real returns. Watch for past performance warnings and the difference between advised and execution-only sales. Another trap: an ISA's tax efficiency does not remove investment risk.
Rule of thumb
Real return ≈ nominal return − inflation (Fisher approximation). If a fund returns 6% and inflation is 2.5%, the real return is about 3.5%.
Worked example
£10,000 invested at 5% for 3 years: £10,000 × 1.05³ = £11,576.25. If inflation averaged 2%, real value ≈ £11,576.25 / 1.02³ ≈ £10,910 - showing growth above inflation but less than the nominal figure suggests.