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Cash ISAs are by far the nation’s favorite type of individual savings account – more than three times more depositors deposit each year than the number of people who deposit into stocks and shares ISAs.
But while cash Isa’s are a great introduction to tax-free savings, they only get you so far. To stand any chance of wealth protection or growth, savers should also consider stocks and shares of Isas.
Best foot forward: To stand any chance of protecting or growing their wealth, savers should consider shares of Isas
The two have similarities. As with cash ISAs, all returns within an ISA of stocks and shares are tax free, money can be easily deposited or withdrawn and up to £20,000 can be saved in a single tax year.
The main difference is that while money in cash Isa is kept in a savings account and earns interest, money in stocks and shares Isa is invested in stocks, mutual funds or investment funds and earns investment returns instead of interest.
While it can pay off to move from cash to stocks and shares, it takes a mindset shift.
Cash Isa savers enjoy the convenience of knowing exactly what’s in their account from day to day – it’s determined by what they’re putting in and the interest they’re earning.
In contrast, the value of Isa shares fluctuates from hour to hour. This volatility means there’s no point investing in it if you think you need to withdraw your money within five years.
If that volatility — and the possibility that you could lose more than gain — makes you uncomfortable, stick with cash.
> Which Isa suits me? Opportunities for savers and investors
1. Choose the perfect Isa provider for you
First you need to decide which stock Isa provider you want to go for. There are many, each aimed at a different type of investor.
Some offer ready-made portfolios. With this, you simply determine how much risk you are comfortable with and how many years you should invest, and the Isa provider will recommend a portfolio that fits this profile.
The more risk, the greater the chance of great returns, but also of losing money if the stock market takes a turn for the worse. They can be ideal if you’re just starting out and don’t want to make too many decisions.
With other Isa providers you can choose your investments yourself. This can be a good option if you are interested in investing and want to build your own fund portfolio.
Choose a provider that will meet your needs not only now, but for years to come as your investment progresses.
> This is Money’s guide to finding the best – and cheapest – shares of Isa
2. Check how much you pay in fees
It is vital to keep loads, which come in different forms, under control. You pay fees to the investment platform through which you hold your Isa, as well as fees for holding certain funds.
These are in addition to other costs, for example for buying and selling funds and shares.
Compare fees across platforms before choosing one as structures vary.
Some charge a flat fee regardless of how much you have in an ISA, others charge a percentage of the amount you own. Which one is right for you depends on how much you invest.
Also compare how platforms score for customer service. When you need help or something goes wrong, you want to know that your carrier is there for you with support and answers.
3. Start slowly with small amounts
Filling your Isa shares with a variety of investments, from around the world and across different business sectors, will make you less vulnerable if the fate of one country or one type of investment spirals out of control.
If you’re ready to dip your toe in the water but not jump your head in, you might want to consider investing a small amount each month.
That way, you don’t run the risk of putting a large amount of money into the stock market right before a recession – you invest through good times and bad.
In addition, you can always invest both money and Isa shares in the same tax year.
However, you cannot deposit more than one of each type of Isa and the total cannot exceed £20,000.
Most stock Isa providers have a list of their recommended funds. While this is no guarantee of future performance, it can provide some reassurance for new investors
4. Build an ISA around trusts and funds
With thousands of funds, mutual funds and stocks to choose from, it can be hard to know where to start.
If you need a steer, most Isa stock and equity providers have a best-buy list of their recommended funds.
There’s no guarantee that these will outperform others, but they do offer the reassurance that experts have spent hours researching them.
Four ideas for your Isa
Here are a few ideas that may suit both novice investors and the more seasoned Isa investor.
Loyalty Index World
It is difficult to determine which sectors and regions are likely to do well, even if the economy continues to prosper. But in this era of uncertainty, it’s harder than usual. So instead of choosing between them, why not buy the lot?
With a global tracker fund, you can invest in thousands of companies around the world. They’re also cheap, so you minimize the risk of your returns being gobbled up by fees.
The Fidelity Index World fund is one. For only 0.12 percent per year you get access to a small part of thousands of companies.
Your return essentially reflects the average performance of stock markets around the world.
Keep in mind that with global tracker funds, you may have greater exposure to major US tech companies than you realize.
City of London
Past performance is never a guarantee of future returns. Yet there is something reassuring about putting money into an investment company that has been around for more than a century.
City of London investment fund was founded in 1891 and has increased its annual dividend every year since 1966.
It invests in major UK companies and pays out a hefty annual dividend income with a 57-year record of increasing payouts.
Vanguard Life Strategy
Some investors want to reduce risk with a fund that holds assets other than equities. Vanguard’s LifeStrategy funds offer a mix of bonds and stocks under one roof.
Bonds are a more defensive asset than stocks, providing regular income and less price volatility. In the five funds, equity exposure ranges from 20 to 100 percent. You choose the ratio between stocks and bonds that fits your risk appetite.
Investment fund F&C
Like City of London, F&C has been around since time immemorial – 1868. It is the oldest investment trust listed on the UK stock market.
The name doesn’t say much, but it is a global fund managed by BMPO Global Asset Management.
Although more than half of its assets are in the US, it has significant holdings in all major markets. Diversification is key.
It will never go out of business compared to some racer funds or trusts when it comes to performance. However, it can be an excellent foundation for any Isa investment portfolio.
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