Deposit accounts are a safe bet, but equities may provide a better return, writes Fiona Reddan

WHILE INVESTMENT guru Warren Buffett might be urging investors to put their money back into stocks, the Government's 100 per cent guarantee of deposits with Irish-based banks means that in these uncertain times, investors are unlikely to find a more secure investment than simply putting their money in the bank.

Although deposit accounts offer very attractive interest rates, investors should consider allocating some of their savings to other "safe haven" investments, which may offer a greater return in the medium to long term.

These might not offer the security of the Government's guarantee - investment products offered by banks in Ireland other than deposit accounts are not covered by the scheme - a little more risk might mean a lot more return. As Brendan Barr, head of marketing with Standard Life Ireland, says: "When there's fear in the market it's a good time to invest."

DEPOSIT ACCOUNTS

With the Government guaranteeing 100 per cent of deposits in Irish banks and attention-grabbing interest rates on offer from cash-hungry banks looking to boost their reserves, many investors are content to leave their savings in deposit accounts in the current environment.

In normal market conditions, the significant downside to deposit accounts is the impact of inflation on the overall value of funds. For example, if inflation is running at 4 per cent, a deposit account paying an interest rate of 4.5 per cent would only lead to a real increase of 0.5 per cent in the value of funds on deposit - and that's before the impact of DIRT.

The 20 per cent Government tax on savings would reduce your 4.5 per cent notional headline rate to just 3.6 per cent in real terms.

Your money may be secure but unless the headline rate is more than 125 per cent the current rate of inflation you are making no money at all. And with DIRT rising to 23 per cent in the budget, your bank will need to offer a rate that is 130 per cent ahead of the rate of inflation if your bank savings are going to make a return for you.

This factor led Buffett to call in the New York Times for investors to return to the stock market. "Today people who hold cash equivalents feel comfortable. They shouldn't. They have opted for a terrible long-term asset, one that pays virtually nothing and is certain to depreciate in value. . . "

The market is anything but normal at the moment, and, despite falling interest rates, banks remain very keen to grow their deposits. With inflation on the decline, the general environment is more favourable for deposit accounts. For example, AIB is offering a rate of 7.4 per cent on its regular saver account, while Halifax is offering a rate of 7 per cent on its regular savings plan for amounts up to €350 a month.

However, this is likely to be just a short-term benefit. Once banks recover from their current turmoil and broader money markets are more easily accessible, expect these rates to decline.

CASH FUNDS

While deposit accounts are the most popular method of keeping your money in cash, there are other more elaborate funds available on the Irish market, including cash funds.

As with deposit accounts, cash funds are low-risk. The managers of these funds put the money invested in short-dated cash instruments such as exchequer bills. Cash funds are generally used as a short-term investment strategy or as a mechanism for balancing the risk profile of an investment portfolio.

Standard Life, AIB Investment Managers and Quinn Life are some of the providers currently offering cash funds to Irish investors.

However, many of these are returning less than most deposit accounts at the moment, with Standard Life's fund increasing by about 4.5 per cent, and Quinn Life's fund up about 3.7 per cent on the year.

Moreover, unlike deposit accounts, such funds charge a management fee, usually about 1 per cent. With interest rates where they are now, deposit accounts still look more attractive.

GOLD

Traditionally the ultimate safe haven investment, gold is seen as a classic hedge against macroeconomic downturns. It exhibits an inverse correlation with stock markets.

Mark O'Byrne, an executive director with Silver and Gold Investments, recommends that investors allocate about 10 per cent of their portfolio to gold.

The price of gold has been rising since 2000, and currently stands at about $780 an ounce. Although, in the short term, it is likely to weaken due to sell-offs from hedge funds looking for funds, O'Byrne says that in the long term, the outlook remains bright. He says gold tends to move in 10-15 year cycles, and is only eight years into its current upswing.

Moreover, when adjusted for inflation, gold remains significantly below the price it was in 1980. As such, O'Byrne thinks it has potential to reach $2,200 an ounce.

However, a key driver of gold's rapid ascent in the past year has been the weakness of the dollar. With the US currency recently recovering to two-year highs against the euro, the price of gold has been moving in the opposite direction - dropping close to 10 per cent since the start of the year.

Other market analysts argue that gold has got caught up in the general slide in commodity prices and see it mounting an assault on the $1,000/ounce level in the next six months.

There are several ways investors can gain exposure to gold. One is by purchasing Perth Mint Certificates. This is one of the safest ways to buy gold, as the Perth Mint is an AAA government-rated institution, and certificates are very liquid. Investors are able to recoup their funds within four days.

With financial institutions in upheaval, investors have turned to buying gold in its physical form, as this can be kept in vaults outside of financial institutions.

The most popular type of coin for smaller investors is South Africa's krugerrand, which are sold as 1oz coins.

Investors can also access gold by buying into a fund that invests in the equity securities of companies whose predominant economic activity is gold mining, such as the BlackRock Global Funds World Gold Fund, which is available from Rabodirect.

BONDS

Although investors in bond debt issued by listed Irish group ISTC might disagree following the collapse of the securities firm last year, bonds are traditionally classed as low to medium risk. Government bonds, or gilts, are seen as safer options than corporate bonds by virtue of having the State behind them.

While returns are often modest, they are significantly less volatile than those in equity markets, and suit investors with a low-risk profile.

Moreover, as bonds are essentially a loan, either to a government or a corporation, they pay an income to the investor or lender in the form of interest payments.

As Ireland significantly increases its borrowing requirements, the expectation is that it will issue more government bonds to fill this gap, thereby reducing the value of funds - while the €500 billion guarantee of the banking sector may also cause Irish bonds to underperform their European peers.

So investors might be wise to diversify their exposure by buying bonds through a fund. The value of such a fund will rise and fall depending on a number of factors, including interest rates and inflation.

Corporate bonds carry a greater risk of default, but often offer a higher return to investors for carrying this risk.

Available for the Irish investor is the Canada Life/Setanta Fixed Interest Fund, which invests in government bonds predominantly from euro-zone countries.

Rabobank also offers a number of options including the Robeco High Yield Bonds Fund, which invests worldwide in high-yield corporate bonds involving higher risk than traditional bonds.

CAPITAL GUARANTEED PRODUCTS

The major attraction of a capital guaranteed product is in its name - unlike other equity market investments, the lump sum you contribute will be paid back to you after a fixed term, regardless of market fluctuations.

Most investment managers offer some form of guaranteed product. Bank of Ireland's Guaranteed Evergreen Fund for example, invests in both equities and property and fixed-interest bonds.

While investors may be scared to put money into equities, it might be a better option than a deposit account if you're prepared to invest for the long term.

"If you can take a long-term view of about 10 years, you'd have to say you'd be better off putting money into a balanced portfolio," says Barr, and he recommends that investors look to diversify their investment across geographic regions as well as business sectors. However, investors should be aware that there is generally a price to be paid for a capital guarantee - lower returns. Unlike other managed products, guaranteed funds keep a higher proportion of their assets invested in low-risk instruments such as cash or government bonds to ensure that the investor gets their money back. In addition, the overall return may be capped. And, as the capital is guaranteed over a fixed term, often about five years, such products also tend to be more illiquid.