Investment ISAs are also known as stocks and shares ISAs. They differ from cash ISAs in that you invest in particular markets, funds or the shares of individual companies.
This means the return you receive is dependent on the performance of the areas you invest in. Therefore, you can lose money as well as gain. Investment ISAs represent a riskier but potentially higher revenue-generating option.
In this article we aim to provide an introduction to investment ISAs so that a potential investor understands what to look for in a fund, what sort of level of fees they can expect to pay for the management of it and some tips on the best areas to invest in.
How to invest
Most people invest through a broker or through an investment company. An increasingly popular option is to self-select to build your own investment ISA.
Who are the main players?
There are hundreds of investment companies in the UK but some of the best-known and highest-performing in the UK include Aberdeen Asset Managers, Jupiter Asset Management Ltd, Black Rock Investment Management (UK) Ltd, Baillie Gifford and J.P. Morgan Asset Management Ltd.
Is an investment ISA a good option now?
With cash Isa rates so low, investment Isas are proving a popular option for the 2011-12 Isa season
Dos and don’ts for investment ISAs
If you decide to put some or all of your ISA allowance into an investment ISA you should do your research into the type of investments you make and the companies that run your ISA fund. In such a huge market there is a wide variety both good and bad.
You can invest £10,680 into an investment ISA for the 2011-12 tax year which ends on April 5th.
Unlike cash ISAs, where the rate is fixed and you know what you will receive back, an investment ISA has risk involved and you need to be prepared to stick with your investment through potentially tough times to generate the best returns.
Most experts advise investors to spread the risk and invest in a variety of investments. We will look at the potential segments that should form an investment portfolio for risk-averse and more adventurous investors later in this article.
Finally, you need to regularly review how your investments are performing and look at potentially changing funds that you are investing in.
However, it is important that you don’t choose an investment ISA if you are relying on the funds to bring you an early return.
Equally, if you are likely to retire in the next few years and want to draw on your income then it is best to avoid the riskier elements that can make up an investment ISA.
If you are young and planning to keep your investment ISA growing for many years you can afford to be a bit more adventurous and you’ll have enough time to ride out a bubble or downturn.
Try to avoid getting cold feet and selling if your stocks value goes down. It is best to rise out the downturn as over a longer period the value of an investment ISA is likely to rise.
Philippa Gee, investments spokesperson at moneysupermarket.com, said: "Investing in equities can be extremely flexible and anyone looking to put money aside can find a product that suits their circumstances. However, it's worth noting that investors should only expect returns in the medium to long term. Generally this means five years at the very least, and ideally eight to ten years.”
How should your investment ISA be balanced?
This depends on your attitude towards risk and the length of time until you want to access your funds. Your portfolio should be balanced and have a mixture of equity markets, fixed-interest investment and property.
Detailed below are mixes for cautious, balanced and adventurous portfolios.
Emerging market and Asian equities – ten per cent
European and US equities – ten per cent
UK equities – ten per cent
Property – 20 per cent
Fixed interest – 50 per cent
Emerging market and Asian equities – 15 per cent
European and US equities – 15 per cent
UK equities – 20 per cent
Property – 15 per cent
Fixed interest – 35 per cent
Emerging market and Asian equities – 30 per cent
European and US equities – 20 per cent
UK equities – 20 per cent
Property – ten per cent
Fixed interest – 20 per cent
Investment ISAs: The latest thinking
Inexperienced investors often panic as shares are falling and sell close to the bottom of the market. Putting your money into an investment ISA will see you gain the best returns over a longer period of time.
Investing a lump sum rather than drip-feeding monthly usually provides the best returns.
Many experts are favouring developed markets this year. The USA is a particularly popular tip because the American economy is showing signs of emerging from the recession quicker than the European economy.
Have a balanced portfolio to spread the risk should one area of your portfolio be hit by an economic crisis.
If you are thinking about how your investment portfolio will perform over the long term then here are some possibilities that tie in with how the demand for energy and resources is increasing.
Three of the best options are:-
Technology – Investing in quoted companies in the USA and UK such as Apple and Oracle. Cloud computing is another good long-term option. It is where computing services are outsourced and then provided back to companies.
Healthcare – With the population in developed countries living longer the requirement for healthcare and care homes will continue to grow. This represents a potentially lucrative investment opportunity over the medium to long term.
Renewable energy – Established countries such as Germany and China are reducing plans to open more nuclear power stations, partly influenced by events in Japan.
Although renewable energy companies have performed poorly in the last few years this could be set to change. As the requirement for more energy increases with the continued emergence of large middle class populations in countries such as Brazil, India and China, so the opportunities for large gains increase.
Keeping the cost of your investment ISA low
Most unit trusts that are actively managed have an initial charge of around five per cent. In addition most have an annual management charge of around 1.5 per cent. However, the market is becoming more competitive and you need to carefully consider the trade-off of low cost with useful advice and management from the investment company you choose.
Investment trusts, shares in individual companies and ETFs pay no commission so cost less to invest in.
One option is to choose a self-select ISA. According to research from Interactive Investor, the online broker, the number of people choosing this option has risen by more than 50 per cent last year and now accounts for nearly one in three of investment ISA holders.
If you have a degree of confidence and knowledge you can in effect be your own fund manager. You can widen the areas that you invest in to include shares in individual companies, investment trusts, exchange traded funds (ETFs) and subscription shares.
Costs can vary considerably so beware. Initial charges for the ISA wrapper and dealing costs can vary from £10-£20 or more per trade. It is best to choose a broker who doesn’t ask for an annual charge and has low deal costs per trade.
If you are transferring from one self select ISA provider to another beware of exit fees and costs relating to the sale or repurchase of assets.
Note: All investment ISAs offer considerable risk and the contents of this article should not be taken as advice. If you are considering investing in this type of ISA you should consult an independent financial advisor.
Check out Myfinances.co.uk's ISA centre for all of the latest news in the run-up to the ISA deadline on April 5th 2011.