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MARKET COMMENT
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I have a problem. Not a huge problem but nonetheless a minor setback. It relates to one of my three endowment policies, which at maturity in seven years time will not be sufficient to repay my mortgage loan. It is a problem that many homeowners who took out mortgages in the eighties and nineties are facing today. According to the projections, the shortfall, at worse, could be £5,700, and in the best case could mean a deficit of £4,450. My endowment fund manager has chosen to use projections of 4%, 4.65% and 5.5% to make the calculations. They have used these lower-than-recommended rates for their calculations simply because they now hold a smaller proportion of their funds in equities. In other words, a recovery in shares is not going to improve greatly the performance of the fund. My problem is how I should tackle the shortfall. A safe option would be to put aside £58 a month in a high interest savings account, preferably wrapped up in a Mini Cash ISA. That way I would earn tax-free interest at around 4% a year and produce the required £5,700 to clear the worst-case shortfall. Another option would be to consider an Index Tracking fund, which could generate a higher rate of return than with bank deposits. I reckon that a 7% return per annum does not seem that unreasonable. On that basis I would only need to salt away £53 a month to cover the shortfall. Of course, there is no guarantee that this method will cover the shortfall, as the market may return less than 7% a year. There are different ways of investing in an index tracker. One is to set up regular monthly payments in a conventional Index Tracking Fund. Another would be through Exchange Traded Funds, which also track an index but are traded more like shares. The Exchange Traded Funds (ETF) that are available in the UK are known as iShares, which are managed by Barclays Global Investors. There is no stamp duty when buying iShares and some brokers don't even charge commission on ETF purchases. That is provided the iShares are wrapped up in a self-select ISA. A range of iShares funds are offered that track specific sectors and markets. For example iShares FTSE 100 (LSE: ISF) invests in a range shares that reflect the FTSE 100 Index. iShares FTSE TMT (LSE: ITMT) tracks the technology, media and telecom sectors. Given that there is only a small difference between £53 and £58 a month, I'm tempted to go for the straightforward cash route. However, anyone in a similar position needs to consider their wider financial position and what alternatives they have to plug any projected deficit. Whatever you do, don't just assume the problem will resolve itself!