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.

Compare with the Independent: See how much you could save by switching credit cards. Compare now

News
peopleTop Gear presenter and all-round controversialist is at it again
Sport
Aaron Ramsey celebrates after opening the scoring in Arsenal's win over Hull `
sport
News
peopleActress speaks out against historic sexual assault claims, saying things have 'gone quite far now'

Arts & Entertainment
A stranger calls: Martin Freeman in ‘Fargo’
tvReview: New 10-part series brims with characters and stories

VIDEO
Life & Style
Guests enjoy food and cocktail parings by Chefs Jimmy Bannos, Jimmy Bannos Jr, Daniel Rose and Mindy Segal with mixologists Josh King and Alex Gara at Bounty & Barrel: A Jack Daniel's Single Barrel Dinner Series at Heaven on Seven on April 9, 2014 in Chicago, Illinois.
food + drinkSprinkle Palcohol 'on almost any dish' for 'an extra kick' firm says...
News
Coren Mitchell, who is the daughter of the late broadcaster Alan Coren and is married to comedian David Mitchell, produced a hand to make poker history at the 98th EPT main event.
peopleJournalist and TV presenter becomes first ever two-time winner of the European Poker Tour
Arts & Entertainment
Shaun Evans as Endeavour interviews a prisoner as he tries to get to the bottom of a police cover up
tvReview: Second series comes to close with startling tale of police corruption and child abuse
Arts & Entertainment
Schwarzenegger winning Mr. Universe 1969
arts + entsCan you guess the celebrity from these British Pathe News clips?
News
politicsLabour launches the 'completely hollow' Easter Clegg
Sport
Luis Suarez celebrates after scoring in Liverpool's 3-2 win over Norwich
sport Another hurdle is out of the way for Brendan Rodgers' side
News
Portrait of Queen Elizabeth-II by David Bailey which has been released to mark her 88th birthday
peoplePortrait released to mark monarch's 88th birthday
Arts & Entertainment
The star of the sitcom ‘Miranda’ is hugely popular with mainstream audiences
TVMiranda Hart lined up for ‘Generation Game’ revival
Life & Style
The writer, Gerda Saunders, with her mother, who also suffered with dementia before her death
healthGerda Saunders on the most formidable effect of her dementia
Arts & Entertainment
Last, but by no means least, is Tommy Cooper and the fez. This style of hat became a permanent trademark of his act.
comedyNot Like That, Like This centres on alleged domestic abuse
Arts & Entertainment
Oxegen in Ireland has been axed as promoters decide it is 'no longer viable'
arts + ents Promoters have axed the event as it is 'no longer viable in current form'
Finacial products from our partners
Property search
Have you tried new the Independent Digital Edition iPad app?
Independent Dating
and  

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

ES Rentals

    iJobs Job Widget
    iJobs Money & Business

    Database Team Lead ( Leadership, Sybase, Computer Science)

    Negotiable: Harrington Starr: Database Team Lead ( Leadership, Sybase, Compute...

    C#.NET Delphi SQL Developer (C#,DELPHI,SQL)

    £40000 - £50000 per annum + Bonus+Benefits+Package: Harrington Starr: C#.NET D...

    VB.NET SQL Junior-Mid Level Developer (VB.NET,SQL,Excellent com

    £25000 - £35000 per annum + Bonus+Benefits+Package: Harrington Starr: VB.NET S...

    Trade Support, Application Support, Operations Analyst, CRM MS

    £45000 - £55000 per annum + Bonus and Benefits: Harrington Starr: Trade Suppor...

    Day In a Page

    Rubin ‘Hurricane’ Carter: The man who could have been champion of the world - and the Bob Dylan song that immortalised him

    The man who could have been champion of the world

    Rubin ‘Hurricane’ Carter and the Bob Dylan song that immortalised him
    Didn’t she do well?

    Didn’t she do well?

    Miranda Hart lined up for ‘Generation Game’ revival
    The Middle East we must confront in the future will be a Mafiastan ruled by money

    The Middle East we must confront in the future will be a Mafiastan ruled by money

    In Iraq, mafiosi already run almost the entire oil output of the south of the country
    Before they were famous

    Before they were famous

    Can you guess the celebrity from these British Pathe News clips?
    Martin Freeman’s casting in Fargo is genius

    Martin Freeman’s casting in Fargo is a stroke of genius

    Series is brimming with characters and stories all its own
    How I brokered a peace deal with Robert Mugabe: Roy Agyemang reveals the delicate diplomacy needed to get Zimbabwe’s President to sit down with the BBC

    How I brokered a peace deal with Robert Mugabe

    Roy Agyemang reveals the delicate diplomacy needed to get Zimbabwe’s President to sit down with the BBC
    Video of British Muslims dancing to Pharrell Williams's hit Happy attacked as 'sinful'

    British Muslims's Happy video attacked as 'sinful'

    The four-minute clip by Honesty Policy has had more than 300,000 hits on YouTube
    Church of England-raised Michael Williams describes the unexpected joys in learning about his family's Jewish faith

    Michael Williams: Do as I do, not as I pray

    Church of England-raised Williams describes the unexpected joys in learning about his family's Jewish faith
    A History of the First World War in 100 moments: A visit to the Front Line by the Prime Minister's wife

    A History of the First World War in 100 moments

    A visit to the Front Line by the Prime Minister's wife
    Comedian Jenny Collier: 'Sexism I experienced on stand-up circuit should be extinct'

    Jenny Collier: 'Sexism on stand-up circuit should be extinct'

    The comedian's appearance at a show on the eve of International Women's Day was cancelled because they had "too many women" on the bill
    Cannes Film Festival: Ken Loach and Mike Leigh to fight it out for the Palme d'Or

    Cannes Film Festival

    Ken Loach and Mike Leigh to fight it out for the Palme d'Or
    The concept album makes surprise top ten return with neolithic opus from Jethro Tull's Ian Anderson

    The concept album makes surprise top ten return

    Neolithic opus from Jethro Tull's Ian Anderson is unexpected success
    Lichen is the surprise new ingredient on fine-dining menus, thanks to our love of Scandinavian and Indian cuisines

    Lichen is surprise new ingredient on fine-dining menus

    Emily Jupp discovers how it can give a unique, smoky flavour to our cooking
    10 best baking books

    10 best baking books

    Planning a spot of baking this bank holiday weekend? From old favourites to new releases, here’s ten cookbooks for you
    Jury still out on Manchester City boss Manuel Pellegrini

    Jury still out on Pellegrini

    Draw with Sunderland raises questions over Manchester City manager's ability to motivate and unify his players