Cash or bonds or shares – what's best for this year's ISAs?
With the end of the financial year fast approaching, it's time to ensure you make the most of tax-free savings
With less than a month until the end of the tax year, savers should be hurrying to top up their ISAs (individual savings accounts) and make the most of their tax-free allowance, but with cash rates so low is it time to switch to the stock market?
Figures from comparison site Moneyfacts highlight how poor cash ISA rates are; the average rate has fallen from 5.15 per cent five years ago to 2.56 per cent one year ago and a paltry 1.79 per cent today. Even worse, many of the best rates do not accept transfers in from a former account, while with a stocks and shares ISA not only can you invest the entire allowance of £11,280, but you are also free to move all of your old ISA money into the stock market without losing the tax-free benefits. But, as with all things stock market related, there are risks involved.
"Four years after interest rates hit a record low of 0.5 per cent, many reluctant investors are accepting they will have to take some level of risk in order to have any chance of achieving a higher income," says Tom Stevenson, the investment director at Fidelity Worldwide Investment.
If you do decide to take the plunge, the all-important decision is where to pile your money. Past-performance tables are worth keeping an eye on, but don't let them dictate your investment choices.
The top two performing ISA funds since April 2012 according to fundexpert.co.uk were Legg Mason Japan Equity and First State Asian Property Securities, while the dog funds included various gold funds such as SF Webb Capital Smaller Companies Gold. Sector-wise, Europe excluding UK and European smaller companies offered top results, while investors with exposure to UK gilts and absolute return saw the poorest returns.
Experts aren't hopeful for a turnaround in UK gilts and many experts believe there is still opportunity for British investors buying Japan-based funds that hedge the weak yen such as Neptune Japan Opportunities. However, chasing last year's story isn't generally a good strategy.
"Don't bank on Europe continuing to be a top performer. The big macro problems haven't gone away. This was recently highlighted by the Italian election result, which was almost revolutionary," says Tom Purdie, a research analyst for Fundexpert.co.uk.
Equally, dismissing poor past performers could mean you miss out on future opportunities.
"We see gold mining funds as undervalued at the moment. Gold mining shares were horrible performers in 2012 (down 19.38 per cent). In contrast the gold price itself edged up. There is now the opportunity for these relative performances to reverse," says Mr Purdie.
"This dichotomy is certainly a lesson to be learnt. Gold mining shares are fascinating, cheap, and an interesting punt for contrarian ISA investors at a loss on what to do this tax year. Those looking to invest should drip money into Smith and Williamson Global Gold".
Initially, the main choice will be whether to focus on bonds or equities. Bonds have proven the popular choice in recent years amid falling interest rates and volatility in the stock market, but equity is the leading asset class for the fifth consecutive month according to the latest statistics from the Investment Management Association (IMA), and for Jason Hollands of fund supermarket Bestinvest bonds now look expensive and offer low income yields.
"In contrast, with the exception of US shares, equities generally look good value compared to where they have traded over the longer term, especially those in latterly unloved markets such as Europe (we like Threadneedle European Select), Japan (we like GLG Japan Core Alpha) and Emerging Markets (we like First State Global Emerging Market Leaders)," he says.
Equities do offer potential for growth but bring more volatility, so it may be prudent to have bonds in your portfolio too. In general, mixing general categories such as equities, bonds and property is a good way to spread risk, but beyond this you need to think about variation in both the geography and the size of the companies you invest in. Diversification should smooth the ups and downs, so consider both UK companies and emerging or developed markets away from home.
Britain has lost its AAA credit rating so investors will be understandably cautious but many of the big UK companies earn profits overseas and offer income yields. Equally, developing countries such as China and India offer impressive potential returns and adding exposure to markets such as Japan and the US will enable you to access areas such as technology and consumer goods companies which are difficult to gain exposure to in the UK.
How you invest will also affect the success of your ISA, so again you may want to combine both passive and actively-managed stock-picking funds withinit. Passive investments such as index trackers and exchange traded funds are cheaper and have a role to play, but you can never outperform the index.
"Passive funds are likely to be best suited to well-researched developed markets where gaining a competitive edge can be more difficult for fund managers while in less well-researched emerging markets, or when investing in smaller companies for example, an active approach is likely to be better," says Mr Stevenson.
The experts also recommend a disciplined approach to an ISA's structure, with no more than 20 funds, which should force you to reassess existing funds every time you are tempted to invest in a new one. Costs are another factor, of course, so keep an eye on fees. If a fund comes with high fees, you need to be confident the manager is able to deliver the right performance. Picking the right adviser or broker will help too, so make sure you understand clearly the potential costs and benefits involved.
Keeping an eye on your existing investments is vital too as a cautious portfolio could become higher risk or vice versa. "Appraising your existing portfolio will show areas where it is weak or too heavily weighted and where any new ISA investments should be focused", advises Mr Hollands.
Independent Partners: Get your free guide on Where to invest your ISA
- 1 The BBC has just done more to eradicate ‘terrorism’ than all our wars since 9/11
- 2 Does the path to true love really lie in these 36 questions?
- 3 Saudi preacher who 'raped and tortured' his five -year-old daughter to death is released after paying 'blood money'
- 4 Presidential optical illusion offers clues to how brain processes faces
- 5 Roald Dahl letter warning student to 'eschew beastly adjectives' rediscovered after 35 years
'We would evict Queen from Buckingham Palace and allocate her council house,' say Greens
French court convicts three over homophobic tweets, in case hailed as a 'significant victory' by LGBT rights campaigners
Greece elections: Syriza and EU on collision course after election win for left-wing party
British Muslim school children suffering a backlash of abuse following Paris attacks
British grandmother Lindsay Sandiford faces execution by firing squad in Indonesia
Louise Mensch says 'F**K YOU' in explosive tweets about David Cameron, Saudi Embassy and the Queen over King Abdullah tributes
iJobs Money & Business
£16500 - £16640 per annum: Recruitment Genius: This fast growing Finance compa...
£30000 - £32000 per annum + benefits : Ashdown Group: A highly successful, int...
£18000 - £20000 per annum: Recruitment Genius: This rapidly expanding business...
£25 - 28k + Bonus: Guru Careers: An In-house / Internal Recruiter is needed to...
Day In a Page
Hibernate during winter and make your living during the summer at this busy guesthouse with panoramic sea views, in the village of Lynton
A four-bedroom penthouse next to the Tate with direct views of St Paul's from two floors of luxurious living space
A four-bedroom detached home surrounded by spacious gardens and woodland, close to New Pudsey
An 18th-century, three-bedroom home near Langstone Harbour built from ships beams with vaulted ceilings and wood burning stoves
A five-bedroom semi-detached home with a mix of period and modern features in a popular and convenient location
This five-bedroom red-brick beauty overlooks the village green and sits in just under two acres of land
A three-bedroom villa with self-contained flat, minutes from Lake Windermere
A deceptively spacious, beautifully presented Georgian home with 3000sq ft of living space and five reception rooms
A five-bedroom Victorian home with four receptions, superb gardens and paddock in Pembury
An eight-bedroom house on the south side of the The Green with cinema, wine cellars and summer house
This 17th century beauty is full of rustic cosiness, while the detached home office means you can also run a business
Four exclusive apartments in a Grade II-listed former medical school with 2,275 sq ft of living space and 18ft ceilings
A five-bedroom terraced house on the popular Peterborough Estate, ideally located for both Eel Brook Common and South Park
A state-of-the-art farm-building conversion on the former Cliveden Estate, with 11,420sq ft of internal space, cinema and wine cellar
A three-bedroom, 15th-century cottage with original features in the picturesque village of Sissinghurst
A six-bedroom terraced house with large south-facing roof terrace, cinema room and wine cellar
A new seven-bedroom home built in Queen Anne-style with swimming pool and parkland views in Mortimer
A listed, four-bedroom farmhouse in the rural hamlet of Rushall with detached barn, four acres of gardens and paddocks
A first-floor flat with two bedrooms, a spacious reception room and communal grounds in a leafy part of London
A three-bedroom flat with a spacious rootop terrace and balcony, accessed from a private gated courtyard
A Grade II-listed pile with six bedrooms, stables and 39 acres of grounds in Standlake
A two-bedroom flat with boutique hotel-style interiors, close to the foodie haunt of West End Lane
A two-bedroom flat in a beautiful old vicarage, with many original features, close to the city centre
A three-bedroom 16th-century home with an aga kitchen, private gardens and heated outdoor pool, in Hadleigh
A three-bedrom home in sought-after Queen's Gate Mews, with Italian marble-finished bathrooms
Surrounded by glorious countryside in the village of Udimore, sits this impressive four-kiln oast and barn conversion
A five-bedroom house in the picturesque village of Kettlewell, north Yorkshire
An 18th-century former coaching inn with original staircase, open fireplaces and beams throughout
A Grade II-listed Georgian town house with three bedrooms and a south-facing courtyard, near Arundel Castle
Feel on top of the world at this über chic penthouse on the 37th floor of one of Europe’s tallest blocks.
A Grade II-listed Victorian villa with six bedrooms and two further cottages, all with spectacular sea views
A grade II-listed, Georgian cottage with mature 50ft garden, perfect for summer entertaining
A magnificent Georgian pile with turrets, seven bedrooms, a heated pool and four acres of gardens
Fairoak Farm has five bedroom suites, gym, outdoor swimming pool and golf course
Chic two-bedroom river-fronted flat with a private lift that delivers you directly to your home
A spectacular seven-bedroom Tudor pile, once owned by Henry VIII, with 18 acres of land
A seven-bedroom Georgian property previously used as a picturesque wedding venue
A split-level flat in a church conversion with two en suite bedrooms and 1,200sq ft of living space
A three-bedroom bungalow situated behind an impressive stone wall, £645,000
Windsor Castle overlooks this three-bedroom Victorian cottage located on one of Windsor's smartest roads
Chapel House is a former vicarage with nine bedrooms in the beautiful Upper Wye Valley
A five-bedroom B&B and separate owner's accomodation with potential for conversion
Enjoy summer by the Thames in this two double-bedroom converted warehouse in Rotherhithe village