Four top tips for richer investing returns

Fed up with low cash rates? If you're going to invest make sure you read this first.

Four top tips for richer investing returns

Inflation leapt to a near two-year high of 1% in September, official figures show.

That means, in order for your cash to retain its purchasing power, it has to grow by more than 1%.

Unfortunately, this rise in inflation comes at a time when banks and building societies have been furiously cutting savings rates.

There is a good chance your current savings account rate won't beat inflation – that means all the cash you're scrupulously putting away is actually losing value.

Research by Moneyfacts shows that less than half (266) of the 644 savings accounts on the market can beat or match inflation.

"Inflation rising to a 22-month high will now play on the minds of many consumers, as there will be very few accounts paying 1% or more," warns Rachel Springall, finance expert at Moneyfacts.co.uk.

However, if you really want to see your savings grow – and beat inflation – you are going to have to turn to the stock market.

"If anyone is unsure about the benefits of investing in the stock market over stashing cash under the mattress, our calculations show if you had invested £15,000 into the FTSE All Share index 20 years ago you would now be left with £55,351," says Tom Stevenson, investment director for personal investing at Fidelity International.

"If, however, you had invested £15,000 into the average UK savings account over the same period, you would be left with a paltry £20,064. That's a difference of £35,287 – far too big for anyone to ignore."

So if you are considering a move into the stock market what do you need to remember?

1. Be wary of bonds

Traditionally, risk-averse investors looking for income put their money into corporate and government bonds. Unfortunately, at the moment that will not work.

"Inflation is also the enemy of bonds," says James Yardley, senior analyst at Chelsea Financial Services. "Because the income paid by bonds is usually fixed at the time they are issued, high or rising inflation can be a problem, as it erodes the real return you receive."

Also, at present huge demand for low-risk investments means the yields offered by many bonds are very low.

But, that doesn't mean you should ignore bonds completely. Any successful portfolio contains a range of assets and bonds could be a part of that, just don't put all your eggs in one basket.

"You could invest in a bond that has a high yield, which may provide a bit of a buffer against the effects of inflation," says Yardley. "GAM Star Credit Opportunities is worth a look and has a yield of 4.5% and Invesco Perpetual Monthly Income Plus is also an option, with a yield of 5.5%."

2. Watch out for fees

When you are trying to make your money work as hard as possible in an inflationary environment it is more important than ever to keep an eye on the fees and charges associated with your investments.

A seemingly small annual charge can have a devastating effect on your investment's growth over the long term.

Many actively-managed funds charge an annual fee of around 1%.

"The difference between 1% and 1.5% might not sound like much" says Shaun Port, Chief Financial Officer at Nutmeg, "but if you invest £15,000 over 20 years in a medium risk portfolio, that difference could cost you as much as £3,000 in returns. Keeping an eye on what you're paying is really important - especially any sneaky fees that might be charged in the background."

So, by all means invest in some actively managed funds but do your research. What are the charges, and is the fund manager good enough to justify that expense?

In contrast, a tracker fund that is operated by a computer and simply mirrors the performance of a stock market index charges as little as 0.25% a year. On a 15 year investment – assuming annual growth at 7% - that would result in a difference of over £7,500.

Another option to keep investment costs to a minimum is so-called 'robo-investing'.

The idea is that, rather than paying a wealth manager to take care of your portfolio, you use a computer programme instead.

Investment companies such as Nutmeg can do this for you and set up a managed portfolio on your behalf in a matter of minutes.

Simply sign up to an investment portfolio based on your risk profile, then computers take care of the rest.

3. Diversify to minimise your risk

The key to a strong investment portfolio is diversification. Spread your money across numerous asset classes and geographic regions and you minimise the risk of your money being decimated by one event.

For example, with equities be sure to invest in a range of industries. When it comes to inflation-busting investments consider which industries and companies are likely to be able to cope with rising costs.

"There are some companies that do better than others in inflationary environments, says Yardley. "Pricing power is particularly important, as the company may be better able to offset rising costs by passing them on to customers."

He suggests investing in infrastructure and energy companies as both tend to be able to raise prices in line with inflation.

4. Keep some cash

Cash may not be king at present but that obviously doesn't mean you should abandon it completely.

Investing should always be viewed as a long-term strategy, so that you aren't affected by temporary market fluctuations.

Ideally, you shouldn't invest for less than five years.

That means you need to keep some of your savings in cash so that you can access it quickly.

If you suddenly need to sell part of your investment portfolio you may find yourself forced to crystallise losses during a dip in the market.

Instead, keep at least an emergency fund in cash savings. The best rate you can get on an instant access ISA right now is 1.1% from The Coventry.

That beats inflation by the skin of its teeth. As mentioned earlier, you may be able to get a better rate by putting your savings into a high-interest current account instead.

Compare investments from stocks and share ISAs to bonds in one place at loveMONEY's Investment centre (capital at risk)