This is a difficult question that many investors will be asking, perhaps because they have just sold a house or have recently come into an inheritance.
If you want complete security for your capital then that effectively means nil return. The top easy access account (Post Office Online Saver Issue 12) only offers interest 1.4 per cent a year gross. Bearing in mind that any income from the interest will be taxed, you are likely to lose out to inflation.
For complete security, our reader would need to spread his £150,000 between institutions. This is because the Financial Services Compensation Scheme (FSCS) has a depositor's protection limit of £85,000 per person, per institution in the event of that institution going bust.
Patrick Connolly, a certified financial planner with Chase de Vere, says: "If you will need access to this money for a specific purpose in 3-6 months’ time than your over-riding priority should be capital protection rather than capital growth. You could consider NS&I Income Bonds which pay a monthly income of 1.25 per cent a year gross, with the full investment protected by the government. This isn’t particularly exciting, but at least you know your money will be there when you need it."
Our reader says he is tempted to go up the risk scale. "I have thought of buying some shares in a ‘safe’ share like GlaxoSmithKline (GSK), or even some bonds (as listed on the IC website), just for some income," he says. "The problem is that the spread will eat into the dividends."
Colin Low, a chartered financial planner at Kingsfleet Wealth says: “If a client approaches me requiring their funds in a short period of time we would not advise share purchase.” He cites the example Ultrasonic, a Chinese footwear maker listed in Germany, which this week said most of its cash reserves in China and Hong Kong had disappeared and it had lost trace of its chief executive and chief operating officer. Investors should also remember the BP oil disaster that began in 2010.
"Stock specific risk is just too great for a short-term investment and even market risk is too great," says Mr Low. "We have now had such a long bull market from March 2009 (barring August 2011) that clients are forgetting what volatility feels like."
Mr Connolly adds: "It wasn't so many years ago that high street bank shares formed the backbone of many supposedly 'safe' investment portfolios. Individual bonds might be a safer option, but can still fall in price, particularly if there are increased expectations that interest rates generally will rise."
Lee Robertson, a chartered wealth manager with Investment Quorum suggests our reader considers the AXA Sterling Credit Short Duration Bond Fund (GB00B564MZ92) with an underlying yield net of tax and after charges of 1.7 per cent. The aim of the fund is to generate returns by gaining exposure generally to sterling denominated investment grade bonds with a bias to short maturities. "The returns are pretty unexciting but it is safe if your reader is concerned over specific shares and is willing to move out of deposits," he says.
By contrast, Mr Low believes that the "only possible option" for someone who wants better returns combined with security is to consider peer-to-peer lending. This is the practice of lending money to unrelated individuals, or 'peers', without going through a traditional financial intermediary such as a bank.
Eight peer-to-peer lenders are members of the P2P Finance Association, which tries to maintain high minimum standards of protection for consumers and small business customers. Zopa, Funding Circle and RateSetter are the founder members and among the longest established of the peer-to-peer lenders. Mr Low says: "There is no FSCS protection, but you have a better chance of capital return than investing with a single blue-chip company over the short term. I'm trialing Ratesetter at the moment - but I can't recommend it as such."
