High Income Bonds

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High Income Bonds

As their name implies, high income bonds are designed for people wanting a higher stream of income than they could ordinarily get from conventional banks or building society accounts.

Tearing into capital

The downside, of course, is that such bonds can tear into your capital more quickly, possibly depleting it rapidly. And like other stock market based investments, there is no guarantee on the return on capital - especially with a higher rate of regular income.

Precipice bonds

Some higher-income bonds - sometimes tagged as precipice bonds - will pay out a fixed income to an investor, regardless of the performance of the underlying investment. Other funds are capital-protected, so that if the fund suffers, the income is also cut back.

Do be aware that the more income that's paid out to the bondholder, the riskier the investment is likely to be.

Considerations for investors

For anyone considering a high-income bond product, do check just how much of your investment is protected - if any. Also, keep any eye on charges. The UK Financial Services Authority (FSA) warns that some funds may deduct their charges for running the investment after they have paid out any income, which can put more pressure on the original investment. Some of these high-income funds have been sharply criticised by consumer watchdog organisations for failing to warn consumers sufficiently of their overall risk.

• Click here for details of how the income is taxed.

High-income products are higher risk investments, and so should only be used as part of an overall financial strategy. In a period of rising interest rates, they should be viewed with particular caution.