You have two tax years left before the arrival of ISAs in which you can invest in a PEP. David Prosser looks at some of the top funds

DECIDING TO take advantage of personal equity plans (PEPs) is one thing. Actually finding the best ones is another matter altogether. There's a bewildering array of plans on offer and, in the run up to the end of the tax year in April, dozens of PEP managers will launch noisy advertising campaigns in an effort to persuade you to part with your cash.

To separate the wheat from the chaff, you need to be sure that you know what you're doing. Remember, in itself a PEP is not an investment, it's merely a wrapper which you can put round other investments in order to avoid paying tax on the income and capital gains they produce.

To compare all managed PEPs in one exercise would be confusing. Different funds invest in different types of assets. And some types of PEP are more risky than others for investors, particularly in the shorter term. So you need to decide which sectors of the market most interest you.

Among investment trusts, you have a choice of five main sectors: UK capital growth, UK income growth, UK general, UK smaller companies and continental Europe - plus a handful of more specialist overseas ones, into which a maximum of pounds 1,500 may be invested as part of a PEP.

There are six main unit trust sectors that will interest investors looking to hold their full pounds 6,000 PEP allowance in a fund which buys UK or European equities. Most index tracking unit trusts are in the UK growth and income sector.

The benefit of dividing unit and investment trusts into sectors is that you can compare like with like when it comes to choosing a fund.

Two factors which are above anything else when it comes to making a decision on which fund to choose are charges and performance, with the latter being the most crucial.

All financial advisers and investment professionals warn investors that past performance is not necessarily a guide to the future. But that does not mean that you shouldn't study past performance. The key is to know what to look for. Most managers can point to at least one period when they did particularly well, however short, and they'll obviously do this in their advertising material. What you should be looking for is consistently good, long-term performance figures, five years or more.

In addition, Jonathan Fry, of Guildford-based adviser and investment manager Premier Fund Managers, says: "Rather than simply looking at a snapshot of five-year performance, we like to look for funds which have produced top quartile performance over the past one, three and five years".

Equally though, when you have identified funds with the top past performance records, don't presume that the run of success will inevitably continue. Among the tests you should carry out, enquire whether the fund manager responsible for past successes is still with the company. Many top performers rely on the stock picking abilities of individual managers rather than employing a team investment approach.

Also, watch out for funds that have got significantly larger in a short space of time. A sudden influx of large amounts of new money can often prevent a manager from doing as well as he has previously. It can take time to research and invest in good quality stocks and shares.

Clearly, charges are important. Every penny you pay in fees to a PEP manager is a penny not being invested on your behalf, as we explain elsewhere. If you're asked to pay an initial charge of more than 5 per cent of your investment, or an annual charge of over 1.5 per cent, ask the provider why.

Charges are particularly important with index-tracking funds. Here performance isn't an issue as long as the manager gets tracking right. The fund moves up and down in line with the market index which it is designed to follow.

The good news is that most of the index trackers have very low charges. The cheapest, the trackers run by Legal & General, Dresdner, M&G, Fidelity and River & Mercantile, all levy no initial fee and an annual charge of less than 1 per cent.

There are certain funds that do stand out. In the unit trust market these include Newton Foundation, Perpetual Income, Schroder UK Equity (all in the UK growth and income unit trust sector), Schroder UK Enterprise (UK equity growth), GT Income, Morgan Grenfell Equity Income (both UK equity income), Gartmore UK Smaller Companies (UK smaller companies) and Jupiter European (Europe).

Good performing investment trust PEPs include Fleming Claverhouse (UK general), Fleming Enterprise, Schroder UK Growth (UK capital growth), Henderson's TR European Growth, Gartmore European Growth (Europe) and Gartmore Smaller Companies (smaller companies).

Picking investment trusts, however, is a little more complicated than finding the best unit trusts. Investment trusts' share prices often trade at a discount to the value of the investments they hold, that is they are below net asset value, making this is an additional factor to consider when picking funds.

Dresdner: 0171-956 6600, Fidelity: 01732 361144, Fleming: 0171-382 8989, Gartmore: 0171-782 2000, GT: 0171-710 4567, Henderson: 0171-410 4100, Jupiter: 0171-314 4900, Legal & General: 0171-528 6200, M&G: 0171- 626 4588, Morgan Grenfell: 0171-256 7500, Newton: 0171-332 9000, Perpetual: 01491 417000, River & Mercantile: 0171-405 7722, Schroder: 0171-658 6000.

David Prosser is features editor of `Investors Chronicle'