ISA How To
By answering a series of four simple questions and reading the information provided, this quick and easy guide should help you decide which ISA suits you. It addresses issues such as whether to get somebody to manage your money for your or whether to do it yourself and, if so whether to choose a cash of equity ISA?
Equity ISAs
First of all decide how much money you want or have to invest in shares - up to £3,000 can go into a mini-ISA this year and up to £7,000 into a maxi. But remember you can't have both, so don't buy a mini if you think you will want to put more than £3,000 into equities later in the tax year.
On the other hand, if you want to retain the flexibility of holding cash, a mini-equity will still let you take out separate mini ISAs for up to £3,000 in cash and, for this year and next, £1,000 in life insurance. The chances are too that a cash ISA provided by a high street bank or building society is going to offer you a better rate of interest than the cash element of a maxi provided by stockbroker (or even the stockbroking arm of a bank).
Remember too that, even if you take out a maxi with a cash element, you cannot later switch that cash into equities. The proportions are fixed in stone from the outset.
If equities are your bag, read Managed ISAs below.
Managed ISAs
Even if you are happy to take on the extra risks of keeping some of your savings in shares, most probably you will have neither the time nor the inclination to deal with selecting and managing the investments in an equity ISA. That suits the investment industry fine, as it gives it the opportunity to charge you handsomely for the privilege of managing your money.
Even so, don't run away with the idea that, if all you have to invest is £7,000 or less, you will be able to get a full portfolio management service which allows you to invest directly in equities. Both the expense and the lack of diversification are likely to make this uneconomic, so the likelihood is that you will be pushed towards a fund or funds or even a fund of funds. This essentially means unit trusts, the newer open-ended investment companies (OEICs) or possibly investment companies.
Essentially a fund is a way for someone with a relatively small sum of money to gain access to a range of underlying investments they could not possibly achieve through direct investment. In some cases, hundreds of individual holdings may be held within the unit trust or OEIC. Moreover, so the theory goes, the investor should also benefit from professional management of his money.
This has been taken one stage further in so-called 'funds of funds'. In these, the underlying investments are not individual equities but other trusts. This gives even more diversification, but can also mean duplication of costs, which can be from 0.5% to 1.5% higher than in ordinary single-manager funds.
One way to attempt to reduce the expense is to go for a 'manager of managers' fund, where the money of the top fund is directly invested in equities chosen by the second layer of management. This has certain advantages, but is not an option which is widely available at the moment.
Self-select ISAs
If having someone else meddling with your hard-won savings does not appeal, then you need a self-select ISA. This is likely to be stocks and shares only, as few are offered by institutions which are competitive in providing a return on cash. And given the expense and diversification considerations mentioned above, the likelihood is that you will be pushed towards a maxi.
You might persuade a stockbroker to open a mini for you, but you are very likely to be pushed towards those funds again. If you want to buy individual equities, the maxi route allows more flexibility, diversification and economy. By far the largest amount invested in stocks and shares in ISAs goes via the maxi route.
There are a number of very cheap on-line execution-only self-select ISAs. And if you want funds, a so-called 'fund supermarket' where a number of unit trusts and OEICs run by different provided are offered by a single manager allows you to do your own switching between funds and providers at minimum expense and inconvenience.
Fund ISAs
Most people on limited means who want to take on a bit of risk are probably well advised to look at funds. Most likely, you will either pick one yourself or a stockbroker or other provider will choose one or several funds (unit trusts, OEICs or possibly investment companies) to suit your circumstances. Stockbroker Killik & Co, for instance, offers a 'Portfolio Builder' service which can start as low as £7,000, equivalent to the maxi ISA limit. You will be put into funds, but some attempt will be made to choose those which seem most suitable to your needs.
Alternatively, some companies offer a more off-the-peg approach. Fidelity has a number of 'packages' of four or five funds offering varying degrees of risk. At the most risky is Global Dynamic Growth, which allows access to 'the most dynamic economies in the world'. At the other end of the spectrum is Star Trackers, a collection of four index-tracking funds.
Fund ISAs Risk Spectrum
Assuming that you wish to play some part in choosing what type of fund goes into your ISA, you have a bewildering array of choices. Indeed, there are now comfortably more unit trusts and OEICs available than there are companies quoted on the London Stock Exchange.
To help cut through these thickets, the industry tends to divide funds between the type of return they offer. These are, in turn, somewhat related to how risky they are, but don't assume that low risk means you won't lose money. Cash in the bank is as close as you can get to a guarantee that you will get back at least what you put in. (And the rules say you can only put cash in an equity ISA if it is for the eventual purpose of investing in stocks and shares. If you don't, you will find yourself effectively being taxed at 20% on the interest.)
