It's ISA time. So will you go for safe or sexy?

With a month to go to the deadline for investing their annual £7,000 tax-free allowance, savers must ask how far they'll go in search of big returns

Use it or lose it. Every year, we are given a £7,000 annual allowance to invest in an individual savings account (ISA), where our money will grow tax-free.

With only a month to go before the end of the 2005-2006 tax year, time is running out. Miss the 5 April deadline and this year's allowance is gone.

It seems that more of us are catching on. This January, sales of equity ISA funds more than doubled to £82m compared to last year, says the Investment Management Association.

However, if you're among those yet to decide what to do with their ISA allowance, it can be daunting trying to work out where to start.

Do you, for example, want a solid but unspectacular mini cash account? The ones offered by Bradford & Bingley and the Halifax pay 5 per cent interest - and at least you know your capital is safe. Or would you like to chance your arm on the UK stock market through an equity ISA? Perhaps you are tempted by the billboard adverts - the posters, say, for the commercial property fund run by New Star. Or what about the "sexy" funds that invest in Brazil, Russia, India and China (known as Brics), available from managers such as Allianz?

Start off by working out your own attitude towards risk. "You must be realistic about your financial goals when choosing an ISA," says Andrew Graham of independent financial adviser (IFA) Allenbridge. "There's no such thing as a free lunch and you will only achieve spectacular returns by putting your capital at risk."

To pin down your attitude, consider if you can afford to lose the money invested. If not, a mini cash ISA is probably the best bet.

Cash investments could also suit if you're nearing retirement. As a rule, you shouldn't be reliant on growth in the stock markets at this point, as you will be exposed to the possibility of a massive downturn just when you need to get hold of your money.

However, those seeking greater returns than cash accounts can provide will need to look to other types of investment, such as stock market funds. Again, though, you will need to have a clear idea of the levels of risk involved.

For example, the FTSE 100 index rose by 22 per cent in 2005 - with many investment funds posting an even better return. But that hasn't always been the case, as Darius McDermott of IFA Chelsea Financial Services stresses: "In 2000, many 'low risk' investors didn't realise technology funds were high risk.

"They learnt the hard way when the dot-com and tech bubbles burst and these 'flavour of the month' investments plummeted."

Mr Graham says low-risk investors may find a bond fund appealing. Since some companies will default on their payments, corporate bonds aren't totally risk-free, but drastic falls in your investment are unlikely.

"There are many types of bond, ranging from government gilts to quality big companies, as well as lower-grade companies that pay out higher interest to compensate for being judged higher risk."

In particular, Mr Graham likes Henderson Strategic High Yield and Old Mutual Corporate Bond.

If you want higher returns, consider dabbling on the UK stock market.

A sound and relatively safe way to invest in British shares is through UK equity income funds that buy into companies paying dividends, says Mr Graham.

Most funds aim to yield more than 3 per cent, which means that even if stock market performance is flat, you should at least be getting some return. And if the market falls, the dividends should cushion the impact.

The top picks of IFA Chelsea Financial Services among UK equity income funds are Invesco, Jupiter and Rathbone.

Once you have a reasonable exposure to UK funds, look abroad to overseas stock markets. But make sure Britain forms the core of your portfolio, with international funds representing "satellite" holdings of no more than 40 per cent, says Mr Graham.

Mr McDermott is a fan of Artemis European Growth and Britannic Argonaut European Alpha, among funds that invest on the Continent. Among others he likes are JPM Japan, Legg Mason Japan and UBS US Equity.

If the idea of building your own portfolio and keeping tabs on it seems daunting, hand the task over to a professional by investing in a "fund of funds".

These vehicles, which tend to have higher overall costs for investors, put managers in charge of selecting a portfolio of underlying funds, and making asset-allocation decisions.

Both Mr McDermott and Mr Graham recommend the Jupiter Merlin fund.

Always take existing investments into account when determining how to use this year's allowance.

HOW TO INVEST: TIPS FOR OPENING AN ISA

You can invest up to £7,000 a year in an equity ISA. Alternatively, you can save up to £3,000 in cash and £4,000 in mini ISAs.

Consider going through a middle man as discount brokers use bulk buying to slash the cost of investing. Most funds charge an initial fee of around 5 per cent when customers buy direct; but brokers can get you the same funds for 2 per cent or less.

You can make monthly contributions instead of putting down lump sums, in order to smooth investment peaks and troughs. Most funds let you save from £50 a month, but some, such as M&G, allow £10 per month.

Independent Partners; Do you need financial advice on your investments, pension or insurance? Book a free consultation with an independent Financial Adviser at VouchedFor.co.uk

Arts and Entertainment
Books should be for everyone, says Els, 8. Publisher Scholastic now agrees
booksAn eight-year-old saw a pirate book was ‘for boys’ and took on the publishers
Life and Style
Mary Beard received abuse after speaking positively on 'Question Time' about immigrant workers: 'When people say ridiculous, untrue and hurtful things, then I think you should call them out'
tech
Life and Style
Most mail-order brides are thought to come from Thailand, the Philippines and Romania
life
News
i100
Life and Style
tech
Voices
Margaret Thatcher, with her director of publicity Sir Gordon Reece, who helped her and the Tory Party to victory in 1979
voicesThe subject is being celebrated by the V&A museum, triggering some happy memories for former PR man DJ Taylor
Finacial products from our partners
Property search
  • Get to the point
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating
and  

By clicking 'Search' you
are agreeing to our
Terms of Use.

ES Rentals

    iJobs Job Widget
    iJobs Money & Business

    Ashdown Group: Business Analyst - Financial Services - City, London

    £50000 - £55000 per annum: Ashdown Group: Business Analyst - Financial Service...

    SThree: Trainee Recruitment Consultant

    £18000 - £23000 per annum + OTE £45K: SThree: At SThree, we like to be differe...

    SThree: Trainee Recruitment Consultant

    £20000 - £25000 per annum + competitive: SThree: Did you know? SThree is the o...

    Recruitment Genius: Administrator - IFA Based

    £22000 - £24000 per annum: Recruitment Genius: This is an opportunity to join ...

    Day In a Page

    General Election 2015: Chuka Umunna on the benefits of immigration, humility – and his leader Ed Miliband

    Chuka Umunna: A virus of racism runs through Ukip

    The shadow business secretary on the benefits of immigration, humility – and his leader Ed Miliband
    Yemen crisis: This exotic war will soon become Europe's problem

    Yemen's exotic war will soon affect Europe

    Terrorism and boatloads of desperate migrants will be the outcome of the Saudi air campaign, says Patrick Cockburn
    Marginal Streets project aims to document voters in the run-up to the General Election

    Marginal Streets project documents voters

    Independent photographers Joseph Fox and Orlando Gili are uploading two portraits of constituents to their website for each day of the campaign
    Game of Thrones: Visit the real-life kingdom of Westeros to see where violent history ends and telly tourism begins

    The real-life kingdom of Westeros

    Is there something a little uncomfortable about Game of Thrones shooting in Northern Ireland?
    How to survive a social-media mauling, by the tough women of Twitter

    How to survive a Twitter mauling

    Mary Beard, Caroline Criado-Perez, Louise Mensch, Bunny La Roche and Courtney Barrasford reveal how to trounce the trolls
    Gallipoli centenary: At dawn, the young remember the young who perished in one of the First World War's bloodiest battles

    At dawn, the young remember the young

    A century ago, soldiers of the Empire – many no more than boys – spilt on to Gallipoli’s beaches. On this 100th Anzac Day, there are personal, poetic tributes to their sacrifice
    Dissent is slowly building against the billions spent on presidential campaigns – even among politicians themselves

    Follow the money as never before

    Dissent is slowly building against the billions spent on presidential campaigns – even among politicians themselves, reports Rupert Cornwell
    Samuel West interview: The actor and director on austerity, unionisation, and not mentioning his famous parents

    Samuel West interview

    The actor and director on austerity, unionisation, and not mentioning his famous parents
    General Election 2015: Imagine if the leading political parties were fashion labels

    Imagine if the leading political parties were fashion labels

    Fashion editor, Alexander Fury, on what the leaders' appearances tell us about them
    Phumzile Mlambo-Ngcuka: Home can be the unsafest place for women

    Phumzile Mlambo-Ngcuka: Home can be the unsafest place for women

    The architect of the HeForShe movement and head of UN Women on the world's failure to combat domestic violence
    Public relations as 'art'? Surely not

    Confessions of a former PR man

    The 'art' of public relations is being celebrated by the V&A museum, triggering some happy memories for DJ Taylor
    Bill Granger recipes: Our chef succumbs to his sugar cravings with super-luxurious sweet treats

    Bill Granger's luxurious sweet treats

    Our chef loves to stop for 30 minutes to catch up on the day's gossip, while nibbling on something sweet
    London Marathon 2015: Paula Radcliffe and the mother of all goodbyes

    The mother of all goodbyes

    Paula Radcliffe's farewell to the London Marathon will be a family affair
    Everton vs Manchester United: Steven Naismith demands 'better' if Toffees are to upset the odds against United

    Steven Naismith: 'We know we must do better'

    The Everton forward explains the reasons behind club's decline this season
    Arsenal vs Chelsea: Praise to Arsene Wenger for having the courage of his convictions

    Michael Calvin's Last Word

    Praise to Wenger for having the courage of his convictions