What's the catch?

The Smart Deposit is a short to medium term investment that is set up over a fixed period. It is a low risk plan that guarantees both your capital and returns over the selected term.

It pays your interest in advance and offers an overdraft facility against your deposit.

You also have the option to take a credit card in conjunction with the investment at an attractive rate of interest.

On first glance the Smart Deposit appears to be a good risk free way to invest for several reasons.

It does have many benefits and can be a good addition to any portfolio as well as having very attractive rates of interest. However, one should be aware of the potential pitfalls with this type of plan. The first thing to consider is what are the penalties, if any, of taking your deposit back before the agreed term has elapsed? How easy is it to get your cash back and how long may it take? With a fixed rate of return the investor should be aware of the effects of inflation on their deposit. If inflation runs at a higher rate than the returns, capital can be eroded in real terms over the investment period. Should interest rates rise, the interest rates offered look less attractive. If investing over a term of five years there are alternative investments that offer potentially higher rates of return. This is a low risk investment and if you are more adventurous or already have a large proportion of your portfolio in cash-based plans then you should look at other asset classes. In this instance unit linked investments should be considered.

The Smart Deposit offers a loan facility but investors need to know how this works and whether there is an additional charge for this?

So who is this type of investment suitable for? Well, first you must be a very cautious investor. Capital security is more of a priority for you than good returns. This is a good plan for someone looking to invest over a short-term and requires 100% capital protection. The ability to take the interest up front gives the investor the option to use the returns for re-investment or another purpose if they so wish.

Overall this type of deposit account is a good, safe option but as with all financial transactions, the investor should read the small print carefully before taking the plunge.

Ben Lester is an independent financial consultant at GlobalEye Group.

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