If you’re looking to compare Innovative Finance ISA (IFISA) products, it’s most likely because you’re comfortable with what an IFISA is and you’re happy with the target returns they can offer you. The next step is to find an IFISA product that ticks the rest of your boxes.
While they are an incredibly important aspect of any investment, choosing an IFISA product shouldn’t be all about returns. You don’t want to be drawn in by a headline rate without understanding anything else about the product on offer, so it’s advisable to consider a variety of features of the IFISA product - as well as brushing up on the key IFISA rules - before investing any funds.
When conducting an IFISA comparison, there are a few things you should be looking for;
- an IFISA provider with experience in the sector and a reliable track record
- an IFISA with a risk/return profile that you're comfortable with
- an IFISA with an underlying asset that you're interested in
- an IFISA with a term length that correlates with your investment goals
The IFISA provider and their experience
Finding an IFISA provider with a proven track record and demonstrable expertise in their sector is essential. You need to be able to trust that they’re reliable, and while no IFISA product can guarantee returns, providers must have processes in place to mitigate risk to the best of their ability.
When looking at IFISA providers, it’s important that you consider their due diligence processes, and an understanding of how they originate and screen lending opportunities is crucial. This information should be readily available to you on the providers website, in their brochure, or in the product’s offer document.
Read more: choosing the best IFISA provider
Think about it this way - if you were looking to invest into a property bond that funds the construction of a residential development, not only should you be assessing the IFISA provider, but also the housing developer that will be in receipt of your money. After all, they’re the ones responsible for getting your funds back to you.
Do some research into the likes of how established they are. Have they delivered quality developments in a timely manner in the past, giving you peace of mind that they’ll be able to deliver the target returns you’ve been offered in the timeframe you’ve committed to?
The risk/return profile of the product
IFISAs are an investment product. This means your capital is at risk, and returns are not guaranteed. They generally have a mid/high risk profile, and offer returns of around 4% to 8% on average, but this ultimately depends on the asset that you’re investing into with the IFISA.
Each IFISA product will have it’s own risk considerations, but the primary risk is that the borrower defaults on their loans, meaning you don’t get all of your money back.
When comparing IFISA products in regards to risk/return profile, your attention will likely turn back to the provider. What processes do they have in place to mitigate risk? Are they reputable, with the relevant expertise needed to be offering the product?
It’s also a good idea to look at whether the IFISA product is asset-backed. If it is, this means your investment is secured against an asset (if the product is a property bond, this could be one or multiple properties for example) and if something were to go wrong, the asset can be sold in order to get some of your money back. Being asset-backed doesn’t rid the investment from risk entirely, but it can offer investors an additional layer of security.
The underlying asset of the product
Understanding how your return is generated from an IFISA is imperative, and at the highest level, IFISAs allow you to hold peer-to-peer (P2P) loans and debt-based securities. The underlying asset could then be consumer loans, business (SME) loans, property bonds or green energy bonds.
Each of these assets have their own features, and one of the key benefits of an IFISA is the flexibility and choice that they allow investors.
If you’re particularly keen to support the growth of the UK property market, an IFISA product with which you invest into property bonds could be of interest to you.
Read more: the impact of property bonds and the IFISA on the UK property market
If you’re focused on tackling climate change by assisting in the production of renewable energy, a green energy bond could be worth your consideration.
The underlying asset of an IFISA can also have an effect on the length of the term that your funds are invested for. For example, if you’re helping to fund the development of residential property, your money will often be tied up for an amount of time that allows the developer to build the homes and sell them, generating your return.
Compare the IFISA products based on the assets in order to see whether one asset suits your fixed term requirement the best. For example, does an SME loan require your money being locked up for longer than you’re comfortable with, while a property bond offers the ideal term length for your portfolio (or vice versa)?
Correlating the product requirements with your investment plan
Though IFISAs are generally considered to be a medium term investment option - often with fixed terms of around 2-5 years - each IFISA product will have its own defined rules in regards to how long your money is tied up for, and how easily accessible your funds are after they’ve been invested.
Read more: how to determine whether an Innovative Finance ISA is right for you
With some IFISA products, you can’t access your money at all until the end of the specified term. Others will allow early access, but they’ll charge a penalty.
For this reason, when comparing IFISA products, you should try to find one that has a fixed term that you’re comfortable with. This will vary depending on a number of things, including the timescale of your investment goals.
Choosing an IFISA product
With a generous tax wrapper, high target returns and wide variety of assets available to hold within it, the IFISAs popularity is unsurprising.
The considerations above should get you off to a good start when comparing IFISA products, and paired with thorough research and advice from an independent financial advisor (if necessary), could help you find the ideal IFISA for you.
The CARLTON Bonds product is available exclusively to experienced investors who are classified as either sophisticated investors, high-net-worth individuals or professional investors and have the knowledge and experience to make their own investment decisions. Investments are high risk and illiquid, your capital is at risk and returns are not guaranteed. Bonds are not protected by the Financial Services Compensation Scheme (FSCS).
Originally published 18th February 2020, updated 7th July 2020.