09:34 08 March 2013
If you're thinking of joining the crowd, but don't really know where to start, we're here to help. Here's our practical guide to investing in a stocks and shares ISA for the first time... .
If you've never invested in stocks and shares before, then it can be difficult to know which funds you should consider. There are thousands to choose from, so it is usually sensible to start with the investment areas you are most familiar with, such as the UK.
Philippa Gee, managing director of independent financial advisor (IFA), Philippa Gee Wealth Management, said; "If you are starting to look at investing in stocks and shares there are a few essential elements you need to consider.
"First of all you need to look at what you want from your investment and how long you can leave the money. For example are you looking for income or growth and can you leave the money invested for at least five to 10 years? These are important considerations which will affect the fund you choose."
Funds for novice investors
A good place to start is often with a tracker fund. As the name suggests, tracker funds usually track a stockmarket index, such as the FTSE 100 Index of Britain's biggest companies.
If you do go for a tracker however, make sure you choose one with a low annual management charge, so that your returns aren't eaten up by fees. Bear in mind, too that if you do opt for a tracker fund, there is no opportunity to outperform the stockmarket, which there may be if you go for an actively managed fund.
However, Patrick Connolly of IFA, AWD Chase De Vere, warned. "Be wary of actively managed investment funds which don't outperform trackers, funds with additional performance fees or 'fund of funds' investments which usually have higher charges which isn't translated into better performance."
Another option worth considering is an equity income fund. These are typically less volatile than growth funds and can produce decent total returns, regardless of whether income or growth is required.
Investing in equities for income usually means a focus on UK companies, where dividend yields tend to be stronger than those available overseas, although investors should be careful to diversify their holdings and may want to consider global equity income funds too.
If you don't want to invest in just one fund, then you can invest in several different funds held in the same ISA wrapper through a fund supermarket. This can help ensure your investments are properly diversified. Patrick Connolly said; "You should aim spread your money across different assets such as equities, fixed interest and commercial property, but make sure this is in the right proportions to meet your objectives and attitude to risk."
Beware the risks involved
Don't just go for stocks and shares because cash rates are low and the stock market has done well recently. There are additional risks involved even in supposedly low risk funds, and you could end up getting back less than you paid in. Only consider equities if you can invest for five years or more, as this will give you a greater chance of riding out any stock market volatility.
Philippa Gee said: "It's vital take a long term view and always look to hold a spread of different assets. Be aware markets are very high at the moment and while this may continue, there may well be a correction - so again get the risk right before investing."
One way to smooth out market volatility is to make monthly payments into your stocks and shares ISA rather than a lump sum investment. This means you will buy fewer shares when their price is high, but more when the price is low. Most fund managers will allow you to invest from £25 or £50 a month.
Remember cash ISAs
Even though cash ISA rates are currently low, if you are nervous about investing your full ISA allowance in stocks and shares, you may want to split it and invest half in equities and half in cash.
That way you will have peace of mind that some of your money is safe and you can always move to another ISA if rates pick up in the future.
One of the best cash ISAs currently available is Coventry Building Society's 60-Day Notice ISA, which pays 2.80% on a minimum investment of £1. This rate includes a bonus of 0.60% for the first 12 months, and you must give 60 days' notice if you want to make a withdrawal.
Alternatively, Cheshire Building Society's ISA Saver account pays 2.50% on a minimum investment of £1,000, although this account has a hefty 2% bonus in the rate which is payable until the end of July next year.
Other options include Barclays Bank's Instant Cash ISA Issue 1, paying 2.30%, but this requires a steep £30,000 minimum deposit. The rate includes a 0.80% bonus payable for the first 12 months. If you only have a small amount to invest, then you can open this account with £1, but you will earn a lower rate of 2.10%, again including a 0.80% bonus for the first 12 months.
Nationwide Building Society's Web ISA Issue 2 pays 2.25% annual interest tax-free, but requires a minimum deposit of £10,000. The rate on this account includes a 1.75% fixed bonus until the end of August next year, and you must have a Nationwide card account to be eligible to open this ISA.
If you are looking for an account without a bonus to move your money to, then one of the best online easy access variable ISA which accepts transfers is Virgin Money's cash ISA paying 2.00% which can be opened with £1.
Please note: Any rates or deals mentioned in this article were available at the time of writing. Click on a highlighted product and apply direct.
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