Risk of pain can mean greater gain growth

In a perfect world we would all like our capital to grow, but in the real world there is usually a trade-off between capital growth and high income. Many investments promise a bit of both, and assets that earn a fixed income will certainly go up and down in value in inverse relationship with variable interest rates. But assets that deliver growth and income consistently are rare as hens' teeth.

Our chart shows that the majority of assets producing growth involve some risk of loss as well as gain. In fact the only assets offering risk- free gains are National Savings certificates and Guaranteed Growth Bonds which actually offer accumulated income, or Guaranteed Equity Bonds from providers such as TSB which through clever use of dealing in share "futures" behind the scenes can guarantee investors against losses, and lock in gains if the stock market rises. The downside of course is that there are no dividends along the way.

Some capital gains are automatically tax-free, like increases in the value of the home you live in, although these will be at best a distant memory to most people. The Treasury has also decreed that capital gains on Personal Equity Plans and special tax shelters like Venture Capital Trusts and Enterprise Investment Schemes will be tax-exempt.

But for most investors the fact is we can make gains without having to take them and even realised gains of less than pounds 6,000 in this tax year, and pounds 6,300 in 1996-97, are tax-free. All long-term gains made before 1982 are now tax-free and taxable gains made since 1982 can be scaled down to allow for inflation.

The biggest choice awaits investors who are willing to accept a genuine risk that their investments may go down in value as well as up. The opportunities available include With-Profits Bonds and Managed Bonds, which are long- term investments bought with a lump sum from insurance companies, and With-profits policies and Endowment policies which are mainly bought through regular savings plans. They are not very flexible however and the progress of the investments is not easy to monitor.

Investment trusts and unit trusts are easier to track and to resell. A wide choice of trusts that specialise in capital growth is available both for lump sum investors and regular monthly savers. Investors with a few hundred pounds to spend can contemplate investing directly in company shares, using low-cost brokers such as Sharelink to keep down commission charges, or "stagging" privatisation issues. Guaranteed capital gains are on offer through buying special low-coupon government stocks, like Funding 3.5 per cent 1999-2004, which offers modest income but at today's price provides a guaranteed 25 per cent capital gain if held until it is redeemed.

Last but not least they can investigate the charms of buying "second- hand" or traded endowment policies, the unwanted policies which are otherwise surrendered by the hundred thousand every year when they could be sold, or bought at auction, by investors who buy the policy and take over responsibility for paying the remaining premiums in return for the full value of the policy including the valuable terminal bonuses when they mature.