By spreading your investments around a number of different investment houses and funds, there is more chance that you will end up investing in a top-performing fund. And if one of your investments does badly, at least you won't have all your eggs in one basket. With hundreds of Pep schemes to choose from, there is no lack of choice.
Simon and Penny Carpenter want to make their capital grow over the next five years. About 18 months ago they each invested pounds 6,000 in a tracker fund - the first time they had put a toe in the water of the stock market.
They also have pounds 20,000 sitting in joint accounts with Abbey National and the Alliance & Leicester (so they are due windfall shares in April). Neither Simon nor Penny has invested in a Pep during the 1996/7 tax year, but they are thinking of doing so before the end of the month. They are also considering investing in another plan in April for the 1997/8 tax year, in case Labour should win the general election and change the current rules in the summer Budget.
"It may be scaremongering, to whip up business," Penny said, shortly after John Major's announcement of the election date, "but we may as well act now, rather than later."
Simon and Penny can diversify their stock-market investments in a variety of ways. So far they have invested only in a UK tracker fund, so their money is in the full range of big UK companies. These funds tend to do well when the stock market is rising, as it has done over the last few years, but if it were to slow down or even start falling, they would suffer.
Many experts now predict that over the next year or two we could see share prices start to stabilise, or even fall. If this happens, tracker funds will follow the market downwards, warns Keith Sanham, a partner at the independent financial advisers Sanham & Co.
Mr Sanham does, however, think the Carpenters should invest their 1996/7 Pep allowance in the UK, to build on the foundations of their investment portfolio.
"Once the market starts moving sideways, investors should be looking for good, actively managed funds such as those offered by Jupiter, Perpetual and some of the Fidelity funds," he says. Once they have done this, they could then look to diversify abroad by investing their 1997/8 Pep allowance in a European fund. But they should make sure the Pep provider they choose will allow them to shelter their windfall shares.
Brian Dennehy, an IFA and managing director of Dennehy, Weller & Co, believes the UK stock market is due for a correction after its recent spurt of growth. He predicts that the market will fall by at least 10 per cent, and by up to 25 per cent over the next two years. If the Carpenters want to invest in the UK, he suggests they choose risk-averse funds.
A small number of Pep managers offer protected or guaranteed capital plans. They promise that over a specified period you will get back your original investment, even if the market falls. Those offering these peps include Barclays, John Govett, Johnson Fry, Legal & General and Marks & Spencer.
Two things to be aware of with such investments: if the market goes up you will not benefit from its full growth; and only your original investment is guaranteed, not the dividends you would have earned from your shares.
For the 1997/8 tax year, instead of investing a lump sum, Simon and Penny could invest a regular amount each month. As Mr Dennehy points out: "This way they would at least be buying into a falling market."
They could also consider diversifying overseas. Under the Pep rules they must invest in EU shares, but up to pounds 1,500 a year can be used to buy non-EU and non-UK shares.
Mr Dennehy recommends investing the full pounds 1,500 in non-qualifying funds. Perpetual's Pep has a monthly savings scheme, and investors can also choose from a range of non-qualifying funds. Perpetual also has made it clear that investors will be able to shelter their windfall shares in its Peps.
Mr Ian Millward, marketing manager at the IFA firm Chase de Vere, agrees that the Carpenters need to diversify overseas. He recommends a European fund, such as Jupiter European or Schroders High Growth Pep. This invests 75 per cent in UK and EU small companies and 15 per cent in the Far East.
These are all volatile markets with potentially high rewards. But investors need to stay with the funds for at least five years, "preferably for seven years or more", he saysn