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Unit Linked Investment Bonds
What is a unit-linked fund?
A unit-linked fund is an investment plan, which combines your money with money from other investors and buys units in a fund. The number of units you get depends on how much you invest and the price of the units at the time you buy.
For example, if you invest €100 at a cost of €1 per unit, you will get 100 units. You can invest either a lump sum or make regular investments, depending on the fund.
Who looks after the fund?
Investment managers look after the fund and will make decisions on how to invest it. They can invest in a mix of assets such as:
- cash or high-interest deposits
- bonds issued by governments and companies, which pay a fixed rate of interest for a set time
- equities, or shares in Irish and international companies quoted on stock markets
- Property including commercial properties such as offices and shops which produce an income from lease or rent.
What risk is involved?
You can choose from a range of different funds to suit your attitude to risk. These include low-risk deposit-type funds, medium-risk funds and higher-risk funds that are mostly invested in the stock market. The safer the fund, the lower the potential return you will receive - so riskier funds can potentially offer higher returns. Almost all unit-linked plans involve capital risk.
Some plans offer a money-back guarantee on a particular date, for example, the sixth anniversary. Such plans usually have lower potential for growth than other unit-linked plans. You should also check the charges to see if you are paying more for this guarantee.
When can you take out your money/what charges do you have to pay?
Unit-linked funds are open-ended, which means you can withdraw part or all of your investment at any time. However, you should be prepared to hold your investment for at least five years as most of these plans may have a very low or even negative return in the early years due to the fact that the bulk of charges are paid in the first five years. Also, if you need to withdraw in the first few years you may have to pay an early encashment fee. You have to pay several general charges on unit linked funds.
Other types of unit-linked funds: with-profit funds
You could consider investing in a special type of unit-linked fund, known as a 'with-profit' or 'smoothed fund', to reduce risk. If your fund performs well in a particular year, the fund manager may hold back some of the growth to prevent a fall in value in later years when the fund may not do so well. This 'smoothing' evens out investment gains and losses, so that there is no dramatic rise or fall in the value of your investment fund in any particular year.
You can only benefit from this fund smoothing if you are prepared to leave your money in the fund and withdraw it only on specified withdrawal dates, such as the 10th anniversary. These are the only dates when your original capital is protected. If you withdraw outside these dates, a penalty known as a market value reduction (MVR) may be applied, which would reduce your investment by a certain percentage.
An MVR is used to protect all investors in a fund and usually applies if you withdraw your money when investment markets are down in value or when there are a large number of withdrawals. You have to pay several charges and taxes on unit linked and with-profit funds.
Warning: The value of your investment may go down as well as up.
Warning: If you invest in this product you may lose some or all of the money you invest.