With the end of tax year less than 6 weeks away, it's no surprise we're starting to receive an avalanche of ISA applications.
If you’ve yet to make a decision, you may find our 10 key tips useful:
1. Don't buy a fund simply because it's a top performer
Take the time to understand why the fund has performed well: is it in a booming, but potentially high risk, sector? (think technology funds in early 2000!) Or was it due to an exceptional manager who no longer runs the fund? If you're then still attracted, satisfy yourself that it suits your attitude to risk and objectives.
2. Avoid 'themes' or 'fads' unless they really are appropriate
A lot of ISA money appears to be flooding into commercial property funds. While we have long advocated the benefits of holding commercial property funds within a portfolio, be careful not to become overexposed. UK Commercial property returns moving forward are also likely to be less exciting than those over the last three years.
3. What are you trying to achieve?
Think carefully about your investment objectives: timescale, income requirements and tolerance to risk should influence your ISA choice.
4. Are you balanced?
A good investment mix can contribute more to performance than individual fund picks. Overexposure to one market or sector puts you at risk and can mean missing healthy returns elsewhere. Aim to invest across a variety of asset classes that have little correlation to each other and spread your equity investments globally across large, medium and smaller companies. Also, don't assume all funds are well diversified; within a FTSE All Share Tracker (e.g. Virgin UK Index Tracker) nearly half of your money is invested in the 10 largest companies on the UK stockmarket.
5. Study the manager
A fund is only as good as the management team behind it, so establish their pedigree. We study the form of all managers and routinely grill over 250 face to face each year for this very reason.
6. Don't pay over the odds
You can slash the costs of investing by taking advantage of Bestinvest's initial charge discounts, typically cutting charges of up to 5.25% to 0.5% or less. Also keep an eye on Total Expense Ratios (T.E.R.s), which show the impact of all annual fees incurred by the fund, including the annual management charge.
7. Use a fund supermarket
An ISA fund is rarely for life, you'll likely want to switch funds at some stage. Fund supermarkets make this fast and very cost effective, while also allowing you mix and match funds from most providers within your ISA. We recommend the FundsNetwork and Cofunds supermarkets, both available through Bestinvest with our competitive discounts.
8. Optimise the tax benefits
Basic rate taxpayers make no income tax saving on equity and commercial property fund income in ISAs, but do enjoy tax-free interest from ISA'ed corporate bond funds. Don't let the tax tail wag the investment dog, but if appropriate structure your portfolio so that you optimise the tax benefits of your ISA (& PEP) portfolio [remember that gains within ISAs are tax-free, this may affect your decision].
9. Don't neglect your existing investments
There's little point carefully choosing a new ISA investment if you neglect your existing investments. Fund manager changes and imbalances mean regular reviews are vital to keep your portfolio in excellent health. Bestinvest clients can review their portfolio by logging into the Client Centre.
10. Consider other avenues
ISAs are not the only tax break on offer to investors. Pensions also offer attractive tax incentives and are worth considering if they suit your objectives.
We suggest you start thinking about using your ISA allowance now, if you haven’t already done so, to avoid making a rushed last minute decision. If you would like more details please call us on 020 7189 9999.