What is a financial investment?
Financial investment definition
An investment can be defined as putting money aside over a certain period of time with the aim of carrying out a financial operation that will generate profits.
In other words, a financial investment is a capital investment which, through banking intermediation mechanisms, makes it possible to finance companies, individuals or public policies (social housing through the Livret A for example). Part of the wealth thus created is then redistributed to investors in the form of interest or dividends in return for the risk taken and the potential immobilisation of the sums invested for the duration of the investment.
The distinction between financial investment and investment solutions
A distinction should be made between financial investment and an investment solution. While an investment solution implies a financial investment, the reverse is not always true.
An individual saver does not have direct access to the stock markets; he or she is obliged to go through an institutional investor (a broker, a bank, an insurance company, etc.) who will offer investment solutions. The latter will offer a range of regulated tax wrappers (life insurance, PEA, etc.) or bank passbooks (also provided for by law) as a vehicle for investing in financial assets.
Thus, when we speak of life insurance or PEA, we are not really talking about a financial investment, but the means by which financial investments are made.
Finally, some financial investments and investments can be made without investment solutions or tax wrappers. For example, when you buy shares in a company over the counter (outside a regulated stock market), you become a shareholder and are not obliged to place them in a securities account or a PEA. The same applies when you invest in real estate or buy shares in SCPI civile de placement immobilier. You have therefore made a financial investment without taking out an investment solution. On the other hand, you could have taken out a life insurance policy to house your SCPI units.
That said, it is possible to divide investment solutions into several broad categories according to the nature of the underlying assets and the savings objectives:
bank passbooks (Livret A, LEP, PEL, CEL, Livret jeune, etc.);
life insurance (euro funds, unit-linked)
stock market savings (PEA, securities account)
retirement savings (PERP, madelin pension, PERCO);
paper real estate (SCPI, SIIC, OPCI).
It is now time to look at all of these financial investments by analysing how they work, their specific features and the applicable tax system.
Bank investments: passbook accounts and term accounts
As a major financial intermediary, banks offer a number of financial investments (regulated or not) with guaranteed capital. In return for the sums invested, savers receive interest without taking any risks.
It is possible to classify these savings solutions into two main categories
sight savings where the sums invested can be withdrawn at any time;
term savings, where the savings are blocked for a fixed period.
Sight savings: the advantage of availability
In addition to the absence of risk, sight savings are characterised by their liquidity, i.e. the possibility for the saver to withdraw his or her savings at any time without paying the slightest fee.
The following are examples of bank sight savings
the Livret A ;
the youth passbook ;
The Livret A
The leading bank investment in terms of sight savings is the Livret A. It is fully tax-free and earns interest on a fortnightly basis (every 15th of the month) at a rate of 0.5%/year in 2020. The maximum amount of deposits is set at EUR 22 950 and does not impose any particular conditions like the Livret jeune and the LEP.
The LDDS: (sustainable and solidarity-based savings account)
The LDDS is a savings account offering 0.5% interest for a ceiling of EUR 12 000. Its operation is modelled on that of the Livret A.
LEP (solidarity savings account)
The popular savings account can be opened by any French tax resident with an annual income of less than €20,017 (valid for 1 part, the latter increases according to the family quota) with a ceiling of €7,700, excluding interest. In terms of remuneration, the interest rate is 1% in 2020.
The Livret Jeune is reserved for people aged 12 to 25 who are tax residents in France. The interest rate is freely set by the banks and cannot be less than 0.75% for a maximum of EUR 1 600 (excluding interest).
Unregulated bank passbooks
Sometimes called super passbooks or boosted passbooks, unregulated bank passbooks work like the Livret A. However, it is the bank that sets the interest rate, not the government. In addition, the interest earned is taxed at a single flat rate of 30%, which often makes them less profitable investments than regulated passbooks, which are fully tax-free. The ceiling is at the discretion of the bank and generally exceeds several hundred thousand euros.
Term savings: PEL and term accounts
Without achieving stratospheric returns, bank term savings offer higher interest rates than sight savings.
Among the best-known term savings solutions, we can cite
the PEL (Plan épargne logement) ;
the term account (CAT).
The PEL is often marketed as an ideal savings solution for making an initial contribution to the purchase of a property. The sums are “blocked” for a minimum of 4 years with a 1% return. The ceiling for the PEL is 61,200 euros.
Since the interest on the PEL is subject to the single flat-rate levy, it is less profitable than the Livret A. Indeed, its net rate is 0.7%. The PEL has therefore been relegated from being an ideal investment to one to be avoided.
The term account (CAT)
Finally, the term account is a savings account that is “blocked” for a specific period. There are many CATs with different rates and specific conditions for blocking funds. Thus, the CAT can be variable rate, progressive rate, fixed rate, with or without early withdrawal possibilities. Returns are linked to the length of the lock-in period. The longer you lock in the funds, the higher the interest rate.
Like unregulated bank savings accounts, the CAT does not offer any specific tax advantages: interest is subject to a single flat-rate levy of 30% or is included in income tax.
Life insurance, a flexible and profitable investment
Very popular among the most informed savers, life insurance can be analysed both as a medium- to long-term investment solution and as a tool for optimising one’s estate.
Here, we will focus only on the “financial” aspect.
On this point, life insurance is a tax wrapper that allows the saver to build up a portfolio of financial assets. Depending on its composition, it is possible to distinguish two main categories of support within life insurance:
The euro fund;
The units of account;
The euro fund: low returns without taking risks
The particularity of the euro fund is that the capital invested is fully guaranteed. The saver is not exposed to the fluctuations of the financial markets so that he is not subject to possible losses. Today, its yield is around 1.50% (0.9 points above inflation, i.e. a positive real return). However, according to forecasts, euro fund returns are expected to decrease in the future. Moreover, there are many different euro funds, not all offering the same returns or investment conditions.
However, the euro fund life insurance remains a financial investment with a relatively high return in view of the total absence of risk for the saver. The euro fund can therefore be an alternative to the Livret A (or other bank current accounts) to build up short-term savings.
Units of account: returns proportional to the risk taken
With regard to unit-linked policies, the operation is the same, but the underlying assets are different. In unit-linked life insurance, it is possible to hold a certain number of financial assets (depending on what the insurer offers you), namely
UCITS (SICAV and FCP), commonly known as management funds;
ETFs (or trackers);
shares in SCPIs, SIICs and OPCIs;
All these financial investments are not guaranteed. However, as a good manager, it is possible to modulate risk exposure according to the proportion of risky assets in the portfolio. Similarly, the longer your investment horizon, the more you reduce the risk by limiting your exposure to market volatility.
On this point, you can read our article on the five steps to good investing.