Investors get their spice at the one-stop cyber shop

As markets recover, we're flocking to the 'supermarket' to buy our funds. What are the pros and cons?
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The Independent Online

It seems the wounds are healing. Last year, individual investors bought around £8.5bn worth of stock market funds, according to the Investment Management Association (IMA) - up nearly 75 per cent on 2004.

This follows the prolonged period of plunging shares between 2000 and 2003 that battered people's investments and their confidence - particularly among those who had invested in the markets for the first time in the late-1990s dot-com boom.

Much of the upturn is down to the robust performance of the FTSE 100, which rose by more than a fifth last year.

Although UK equity income funds were the biggest sellers during 2005, popular themes also included commercial property and specialist industries.

This year, there's excitement over a new breed of fund that invests in Brazil, Russia, India and China - collectively known as "Brics". Their appeal rests on predictions of phenomenal economic growth over the next couple of decades.

Allianz Global Investors plans to launch its Bric Stars on 22 February, the first UK-based fund of its type. Although high risk, the company anticipates popularity among investors looking to spice up their portfolio.

Amid all the activity in the markets, another big change has taken place. More of us, says Helen Richardson, a director at independent financial adviser (IFA) Pantheon Investments, are using online fund "supermarkets" to buy and sell investments. Like their high-street namesakes, the idea here is to bring plenty of choice to one place at cheap prices. After emerging in 1994 as a tool for financial advisers, the supermarkets are coming of age for individual investors.

In essence, you buy and sell funds on the internet using a single website - usually run by an IFA, discount broker or fund manager. The pros are that the charges are low, you can view your portfolio at any time, you can manage and switch funds online, and hold different funds inside a single individual savings account (ISA).

However, there is no financial advice given, so you'll need to be a confident investor as all the decisions will be yours.

Here's how it works. Rather than go to an IFA or direct to a company to buy a fund, log on to a supermarket website and set up an account.

Instead of paying a hefty 5 per cent initial fee to "buy in", the charge is usually 1.25 per cent or less - and nothing in many cases.

The usual 1.5 per cent annual management charge (AMC) is split between the fund provider, the online supermarket and - if you're using a supermarket provided by an IFA - the adviser).

In some instances, such as with IFAs Hargreaves Lansdown and Chartwell, part of your AMC is also rebated into your account.

"The exact discount will vary between the different fund supermarkets and discount brokers and also according to the fund, so it is worth shopping around," says Ms Richardson.

The savings can be substantial. Invesco Perpetual Income, one of the most popular UK funds, levies an initial fee of 5 per cent if you go direct to the company. But buy the same fund via Fidelity FundsNetwork, a supermarket, and the charge is just 1.25 per cent. Or go via supermarkets at the websites of IFA BestInvest or discount broker Chelsea Financial Services, and it will cost nothing at all.

Being able to switch your money from one fund to another online - say if constant poor performance is eating away at your returns - is another advantage, adds Ms Richardson. Most supermarkets charge 0.25 per cent of your fund's value to cover the administrative costs of a change.

"Your money is out of the market for a matter of hours; transferring your ISAs between groups if you're not using a fund supermarket could take weeks."

It used to be "a tedious task to sell one fund and buy another across the various providers," says Mark Dampier, head of research at IFA Hargreaves Lansdown. "It required high diligence or great organisation, so before the supermarkets, people tended to get [heavily] invested in certain funds and [failed to] rebalance these."

Fidelity FundsNetwork estimates that more than £20bn is now invested through UK supermarkets. And it isn't just new investors who can benefit: you can reroute all your existing funds, including personal equity plans (Peps), from your IFA or fund firm to the supermarket.

However, while people may be getting wise as to where they invest, how they invest is more open to question. IMA figures reveal that sales of equity ISAs, which let your money grow tax-free, actually fell by 10 per cent last year.

As Mr Dampier points out: "People are forgetting about their [£7,000] ISA allowance, not bothering or aren't aware."

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