Keep your wits about you in the last-minute sprint for an ISA

With shares so low, ensure you use the time left to get a deal that defies the downturn, says Melanie Bien

With just under a week to go until the end of the tax year, this is the last chance for investors to think about where they are going to put this year's £7,000 individual savings account (ISA) allowance.

With just under a week to go until the end of the tax year, this is the last chance for investors to think about where they are going to put this year's £7,000 individual savings account (ISA) allowance.

But if you are determined to invest all or part of your allowance, don't rush into a decision. You're likely to regret buying an ISA too hastily, particularly in the current market conditions.

If you haven't yet made up your mind where to invest, research the market carefully, bearing in mind your risk profile and when you want to get hold of your funds. If you have only £1,000 to put aside and there is a chance that you'll need the cash within the next 12 months, steer clear of the stock market.

Mini cash ISAs, which work like ordinary savings accounts and don't expose your money to equities, are the best option. You can invest up to £3,000 each tax year in a cash ISA, many of which require no notice, allowing you to get your hands on your money in an emergency. They offer higher rates of interest than other savings accounts, plus returns are tax-free. Monmouthshire Building Society is paying 4.25 per cent on balances of £10, while Kent Reliance and Safeway are both paying 4.20 per cent. For a full list, go to www.moneysupermarket.com.

Insurance ISAs are another option but you can only invest up to £1,000 in each tax year. Just a handful of providers offer them, including Co-operative Insurance and NFU Mutual. And because they invest in with-profits funds, many impose a market value adjuster when you try to cash in all or part of your fund.

The prospect of significant growth in the long term is only really available from exposure to equities. But you must stay invested for at least five years. With the stock market in the doldrums, shares are cheap, so your money will go further.

However, investors remain wary of equities because of economic instability and the war with Iraq. Three out of four investors are cautious and neither increasing nor decreasing their exposure to the stock market, according to new research from the Association of Investment Trust Companies (AITC).

Yet it would be a shame to miss out on the potential returns offered by equities. And it is possible to spread your risk through diversification.

"Even within an ISA you can pick up four or five funds," says Kerry Nelson at independent financial adviser (IFA) Bates Investment. "I'd stick mainly with UK funds and perhaps one global fund. You should opt for funds without any style bias, which are renowned for stock picking and are quite pragmatic. An equity income fund or distribution fund giving you a little bit of exposure to bonds would also be useful."

Ms Nelson recommends Lazard UK Alpha and Framlington UK Select Opportunities for your UK fund. For equity income she likes the Invesco Perpetual Income fund; for distribution funds she recommends New Star Distribution or Jupiter Distribution; and for global funds, Fidelity Wealthbuilder.

Some fund managers are launching products to address investors' current concerns about risk. Gartmore's Cautious Managed fund, for example, gives you exposure to equities but also invests in lower-risk bonds, so reducing overall volatility. The fund offers regular income and the prospect of long-term capital growth.

The best way to invest in several funds is through fund supermarkets, which have greatly reduced charges. Even if you are only investing in one fund, the initial charge (which can be as high as 5 per cent) is usually cut by 2 or 3 per cent if you invest via a supermarket, and in some cases may be removed completely.

Among the best-known fund supermarkets are Fidelity's FundsNetwork (www. fidelity.co.uk/direct/select/ fundsnetwork), FundsDirect (www.fundsdirect.co.uk) and Ample (www. ample.com).

Some IFAs also offer their own supermarkets where you can buy funds, without advice, at discounted prices. They include Chelsea Financial Services (www.chelseafs.co.uk), Bates Investment (www.wiseup.com), Hargreaves Lansdown (www.hargreaveslansdown. co.uk), Chase de Vere (www. chasedevere.co.uk) and Charcol (www.charcolonline.co.uk).

Investors can also reduce risk by not investing a lump sum. This does not mean missing out on this year's ISA allowance: you can earmark your money for equities while keeping it in cash and feeding it on to the market over a period of up to 12 months. Known as "phasing", this strategy allows investors to smooth out some of the market's peaks and troughs.

Philippa Gee at IFA Torquil Clark recommends Fidelity's FundsNetwork to phase your money in because it will give you a wider choice of funds than you would get with an individual manager. Foreign & Colonial, Henderson Global Investors and Invesco Perpetual all offer this service as well.