Save or Invest? Deposits v equity income fund

Despite inflation staying at the same rate in May, savers are struggling to maintain the purchasing power of their savings. The Office for National Statistics said that the Consumer Prices Index (CPI) remained at 4.5% in May and as the average interest available on an easy access savings account is just 0.89% savers are finding themselves in a nightmare situation trying to find an account which will keep pace with or beat inflation.   

To stop savings being eroded by inflation, a basic rate tax payer would currently need to find an account paying 5.63% per annum, for higher rate taxpayers this would increase to 7.5% The only deposit based option currently being the recently launched tax-free NS&I 5 year Index Linked Savings Certificates which offer index linked interest + 0.5%    

So what are the other alternatives? In the current climate where interest rates are at historical lows of 0.5% and set to remain there in the near term, equity income funds may be worth consideration for those who are prepared to accept the additional risk of moving from deposit based to equity based assets*.

Neil Woodford’s Invesco Perpetual Income fund has a current yield of 3.95% and the prospect of some capital growth thrown in.

In 2009 / 2010 he lagged the sector due to his cautious outlook on the economy and aversion to cyclical stocks such as mining. His preference was towards quality growth companies trading on depressed valuations, such as pharmaceuticals, tobacco and utilities. However, there are signs that his strategy is coming good in 2011, with his Income fund returning a solid 7% this year so far.

Woodford’s defensive strategy provides potential for rising dividends and growth, and we see this as an opportunity for investors to buy into an excellent fund at fair value.

Why not take a look at our investment pages where you can invest in the Invesco Perpetual fund at a discounted rate and view details of other funds. Alternatively click here to request advice from an adviser.