It’s widely recognised and understood that any investment involves an element of risk – the threat of not getting all or some of your money back.
Against a continuing background of low interest rates, IFISAs offer some of the benefits of a Cash ISA - in the form of interest payments - but at rates that are typically higher than the rate of inflation. However, it’s important to remember that an IFISA is an investment and not a
cash deposit account that can be dipped into when required.
In terms of risk and return, IFISAs sit between Cash ISAs and Stocks and Shares ISAs. They generally offer a higher rate of return than Cash ISAs, with a greater level of risk - as there’s always the possibility of capital loss if the borrower defaults on their loans. Stocks and Shares ISAs tend to offer higher returns over the long run, however the market is volatile and they carry a risk of daily fluctuations in value.
Unlike Cash ISAs, an IFISA is not covered by the Financial Services Compensation Scheme (FSCS). This is a government scheme which compensates investors for up to £85,000 in the event of a firm’s failure - as long as the firm was authorised by the Financial Conduct Authority (FCA).
There are a number of IFISA providers operating in the market, each of which will vary in
terms of their track record, years operating in the sector and the type of backing behind them. It is vital that thorough research is undertaken, not only into the type of investment you are interested in, but also into the provider themselves.
It’s likely that your capital funds in an IFISA will be tied up until the maturity date. As part of a diversified portfolio, an investor should consider balancing such an investment with others that are more liquid or which have a range of maturity dates. An investor should take appropriate steps to mitigate any risk, and this will always involve taking professional independent advice.