With a volatile stock market, rock-bottom interest rates and an ever-expanding investment landscape, it’s unsurprising that many investors are considering methods of adjusting their portfolio.
Whether looking to alter its weighting, or hold alternative assets that allow for impact investing, utilising the Innovative Finance ISA (IFISA) allowance – which is £20,000 in 2021/22 – could be a consideration for those experienced investors focused on building a better portfolio.
Although the term ‘better’ is open to interpretation, the sheer variety of investment options available with an IFISA – including environmental projects, SME loans and property bonds – mean it has the ability to bring numerous potential advantages.
The popular and often resilient asset of property can be held in an IFISA
There is a reason property is one of UK investors’ most favoured assets – it has the potential to be incredibly lucrative, it has proven to be relatively resilient throughout times of financial crisis, and it brings opportunities to invest with impact.
And it is possible to utilise your IFISA allowance to add the popular asset to your portfolio via property bonds.
With property bonds, investors have the potential to earn returns of typically between 4% and 8%, and thanks to the ISA tax wrapper, these returns are completely free from income and capital gains tax.
In addition, property bonds are an important consideration for experienced investors wanting to invest for impact, especially now. As the UK faces an ongoing housing crisis – whilst the importance of housebuilding to economic growth is more evident than ever – it’s crucial that small and medium-sized housebuilders are able to re-establish themselves in the market and aid in tackling the housing shortage.
In order to do this, the alternative finance provided through investments such as property bonds is crucial.
When holding a property bond in your IFISA, you are not only generating high potential returns, you are supporting regional SME housebuilders in delivering much-needed housing – as well as providing local jobs and helping to boost economic growth.
An IFISA can be used to adjust the weighting of your portfolio
After over one year of an extremely volatile stock market and rock-bottom low interest rates in response to the Coronavirus pandemic, it is unsurprising that many investors are looking to adjust the weighting of the investment portfolios.
This is particularly true for investors who are currently invested heavily into high risk equities, have a large sum sitting in savings accounts such as the Cash ISA, or are invested largely into a single asset type – and this is possible with the IFISA wrapper.
The IFISA can be a useful tool when looking to rebalance a portfolio as it has the ability to hold a number of different assets – all of which are uncorrelated to the fluctuations of the stock market and the Bank of England base rate.
The versatility of an IFISA makes it an important consideration for diversification, and uncertain times may present an opportunity to consider a different approach which could include investment into alternative assets that sit outside of the traditional asset classes – again possible with an IFISA, which allows investors to hold peer-to-peer loans and debt-based securities.
Experienced investors can achieve exposure to the property market by investing into property bonds via an IFISA – backing small and medium-sized housebuilders in tackling the UK’s ongoing housing crisis.
As well as this, with the ability to invest into green energy projects, it’s possible to improve your ESG weighting with an IFISA, something that has become increasingly important for impact-driven investors in recent times.
And what’s more, the tax reliefs available through IFISA investments means you could adjust your risk weighting in some way, in terms of the target interest rates you need to focus on for your desired returns. For example, to achieve the same returns as you would at 7.75% per annum within the IFISA wrapper (a notable target rate for property bonds) outside of the wrapper, the gross equivalent rate is over 14% for an additional rate taxpayer. This is almost double the target interest rate you would need to target for the same level of return.
Adding an IFISA to your portfolio could diversify your timeframes
As an experienced investor, it’s likely you’ll be holding a Stocks and Shares ISA in your portfolio – which is a long-term investment that should be held for a minimum of 5 years – as well as a Cash ISA for funds where access is needed at a moment's notice.
But an IFISA can be seen as the middle-ground in terms of timeframes to a Cash ISA and Stocks and Shares ISA in many respects.
Considered a medium-term investment, the length of an IFISA’s fixed term will be dependent on the asset and the provider, but they are typically between 2 and 5 years long.
Whilst, generally, the longer your funds are locked away, the higher the potential returns, you do have a choice with an IFISA. And even with an IFISA that has a fixed term of just 2 years, you could be targeting potential returns of around 7%.
Therefore, by utilising your IFISA allowance and adding an IFISA to your portfolio, you have the opportunity to further diversify the timescales of your investments – which could be an ideal option for those medium-term investment goals.
Utilising the IFISA allowance
The IFISA allowance – and the IFISA itself – presents experienced investors with plentiful opportunities to build a diversified portfolio that targets high potential returns.
After months of uncertainty and a volatile investment landscape, utilising the generous IFISA allowance to invest into alternative investments that have no correlation with the notoriously fluctuating stock market or dwindling interest rates could set experienced investors on track for a better, more diversified portfolio.