ISAs built to survive a market massacre

Sales are down, but some plans will reduce the risk and exploit an upturn

Only 20 per cent of investors are planning to use their individual savings account (ISA) allowance this year, and of those, most are putting their money in a mini cash ISA instead of equities.

This finding, in a new survey from JPMorgan Fleming, is supported by the latest figures from the Investment Management Association (IMA). With five weeks to go until the end of the tax year, this is a time when investment houses would expect money to be pouring into their funds. However, the IMA reports ISA sales of only £392m in January, down from £584m in December and almost half the level of January last year.

While investor wariness is understandable, in the longer term, equity exposure should reap higher returns than holding your money in cash.

"Both bonds and equities currently offer good long-term growth opportunities," says Peter Brewster, head of market research at JPMorgan Fleming. "It is now possible to identify many top- quality companies available on relatively cheap valuations, and which also offer very attractive dividend yields. Investors should seriously consider taking advantage of this now rather than waiting for the stock market to recover, when the opportunity will be quickly lost."

If you would like to use your ISA allowance and invest in equities before the end of the tax year on 5 April, but are concerned about the state of the markets, there are various ways to spread the risk.

A number of investment houses – including Fidelity, Foreign & Colonial and Invesco Perpetual – offer a phasing option that lets you invest your full ISA allowance in cash and then drip-feed it into your chosen fund over an extended period (usually six months). In this way, if the markets fall further over the next couple of months, only some of your money will be exposed.

"It is understandable that with volatile markets and the prospect of a war, some investors feel uncomfortable about putting a lump sum into the stock market on one particular day," says Ann Davis, executive director at Fidelity Investments. "Phasing offers these hesitant investors the option of drip-feeding their money into an ISA over six months and so benefiting from the effect of pound-cost averaging, which helps iron out the ups and downs of the stock market."

Fund supermarkets, such as Cofunds and Fidelity's FundsNetwork, offer the same option, and have two main advantages. First, if you go via a fund supermarket, you can invest in any fund on its platform; if you go direct, phasing may not be possible since not all investment houses offer it. Second, using a supermarket is more cost effective as the initial fees are discounted. The average charge via FundsNetwork is between 1.25 and 1.5 per cent; you'd probably pay an initial charge of 4 or 5 per cent if you invested directly.

Clearly, the level of risk you take depends on which funds you choose, but the aim of any investor should be to build a balanced portfolio. "A lot of people get dragged into what's done well this year without taking into account existing investments," says Kerry Nelson at independent financial adviser (IFA) Bates Investment Services.

And diversification may be easier to achieve than you think because many people don't realise they can invest in more than one managed fund within a single ISA wrapper. A number of investment houses – such as M&G and Cazenove, Jupiter, Fidelity, Credit Suisse and AXA – offer "funds of funds". As the name suggests, these invest in a range of funds, providing immediate diversification and helping to spread risk.

A similar option is an ISA package, offered by both FundsNetwork and Egg. The package will be based on a theme or sector, such as UK Growth, and within each one you have exposure to a number of funds.

For example, FundsNetwork's Global Superstars gives global diversification by investing in Fidelity Special Situations, Threadneedle European Growth, Govett US Opportunities, Schroder Tokyo and First State Asia Pacific.

Alternatively, you can build your own individual savings account. Most online stockbrokers offer self-select ISAs that allow investors to put money in a number of shares and/or managed funds within one ISA wrapper.

"Self-directed investors are increasingly looking for breadth of selection and best value," says Ivan Schouker, chief executive of online stockbroker American Express Sharepeople. "Self-select ISAs offer unrivalled flexibility and choice."