Shares beckon as interest rates fall

ANOTHER crash is coming and this time it won't be the stock market. Tumbling interest rates will affect millions of people, and if you have all your savings in the building society or bank you must act now to make sure your money keeps growing at a decent rate.

Analysts predict that interest rates could fall to 4 per cent by 2003. This means you may get less than half your current rates of interest on savings. We are already down to 6.75 per cent, with a further fall possible next month as the Government tries to kick-start the economy. Any commitment to move us into the European Monetary System can only happen if we meet strict entry criteria. One of these will be that base rates are low, in line with our European partners.

With the future so bleak for savers, what can you do to maximise returns? The first thing to consider is venturing on to the stock market.

Before you do this think about how much money you need to leave in a savings account for emergencies and how much you can put away for the long term. Do not put anything on to the stock market unless you can leave it there for several years.

Over the last few years most savings accounts have not kept pace with the effect of inflation and taxation. Figures since the start of 1987 show that despite the stock market crash in October 1987, you would still have made a profit after five years, whereas your deposit interest fell by 50 per cent.

You could even argue that deposits are riskier over the longer term.

Here are three practical strategies to help building society loyalists beat interest rate falls.

Make more from the building society. The first thing you should do is to consider locking some of your capital into a fixed-term account such as a bond. This means you lock your money away for a 12-month or two-year period and receive a fixed rate of interest, protecting you from further interest rate falls. Typically you will get around 6 to 6.5 per cent from leading building society bonds.

For example, the Portman BS is currently paying 6.5 per cent on pounds 500 or more. Any building society bond investment should give you a right to a windfall if the society is taken over. (Some societies ask new members to donate any future windfall to charity).

PEPs for the cautious. There are so many PEPs available that even the most cautious investors can have a PEP and still sleep at night. In these turbulent times for the stock market many people choose a fixed-interest vehicle (which means you aren't investing in shares) such as a corporate bond PEP. I like the Henderson Preference & Bond that invests in gilts (government bonds) and other fixed interest investments.

This fund has a yield of 6.4 per cent a year and is ranked among the best in its sector. Over the last five years pounds 1,000 invested in this plan would have grown by more than 10 per cent a year so your original pounds 1,000 would now be worth pounds 1,612.

For those who want to hold some funds in blue-chip (big name) UK stocks then the HSBC High Income Fund offers a balance between fixed interest investments, including bonds, and quality UK shares. This fund began three years ago and has increased a pounds 1,000 deposit to pounds 1,491, placing it fourth in its sector.

Since the market has seen such large rises and falls in recent months I would suggest that now is a good time to be buying quality funds. Both of these funds will allow you to take income that is paid direct into your bank account.

Go for a hybrid. Many people who have not invested in shares before are nervous about taking their money out of the safety of the building society. One product that we feel provides a good middle road into the market is the Income Provider Plus, offered through Henderson Investors. This package invests one-third of your capital in the Nationwide Building Society, receiving 6.7 per cent gross. The rest goes into the Henderson Income and Growth Fund.

You can take an income of up to 10 per cent a year from this fund, which helps those who need to keep a regular income flow from their investments. A pounds 15,000 investment in October 1992, taking income of 7.5 per cent a year, would have given you pounds 113.22 a month this year. At these rates you would not have eaten into your original capital - it is still growing. Don't forget the real benefit of investing in shares: you can take a rising income and should still see the value of your capital go up.

Wai Man Cheung is managing director of WMC Investment Managers, a Dorset- based firm of independent financial advisers.

Henderson Investors, 0800 106106; HSBC, 0800 289505; Portman BS 0800 807080.