INDIVIDUAL savings accounts - more usually referred to as
ISAs - are one of the simplest ways to invest in a tax-efficient manner. All growth is free from both income tax and capital gains tax although the Chancellor deducts tax from dividend income.
An ISA should be thought of as a "wrapper" within which the investment is held. Up to £7,000 can be saved by each adult this way in every tax year. There are two routes: "maxi-ISA" for a stock market investment where up to £7,000 can be invested, or "mini-ISA", which allows a split between the stock market (up to £4,000) and the balance in a deposit scheme.
In the long term, the stock market has always outperformed cash. Even if you can secure 6 per cent, the real rate of return is nearer to 2 per cent once inflation (3.9 per cent) is allowed for. For an ISA, it can be individual shares but unless it is an investment trust (which pools money to purchase shares in a wide range of companies), there is far less of risk of loss in a collective investment like a unit trust or open-ended investment company (OEIC). Yet there is a bewildering array of such funds. At a recent count, 2,248 were listed.
This is where an independent financial adviser can guide through the savings maze. They can help you to assess your attitude to risk and guide on the basis of goals, which may be to repay a home loan or provide for school fees or retirement. Just as importantly, a trusted IFA can help you to steer away from risky and/or underperforming areas or specific funds.
With the escalating price of oil, Michael Stokes, a leading Edinburgh IFA with his own business, likes funds which specialise in renewable energy. He tips both Merrill Lynch New Energy Technology and Schroder Global Climate Change Solutions.
With agricultural commodity prices jumping, Stokes also recommends Schroder Agricultural Commodities Fund. By contrast, he urges savers to avoid the banking sector. "Banks are exposed to too many high-risk loans," he says.
Given the woes of the US homeowner and consumer sectors, the so-called emerging markets "still look the place to be," tips Paul Galloway of Edinburgh Risk Management. Whilst de-coupling from the predominant American economy is not going to happen overnight, the long-term momentum is clearly there.
He likes Artemis Global Growth, managed by Peter Saacke, which has had an excellent performance record since he took over. It is currently overweight in emerging markets and Europe but light on Japan and North America.
Galloway says the strongly performing commodity sector may not be set to continue at the same pace but, on looking at an inflation-adjusted commodity index back to the 1970s, "there could still be more [growth] to come."
For a balanced fund with a highly managed approach and a sensible total expensive ratio (the total deductions), Edinburgh-based Wishart Wealth Management is recommending Midas Balanced Growth Fund. Unlike many in this field, it has an AAA rating by analysts Citywire. It has a sizeable weighting in overseas stocks but good diversification into alternative investments and fixed interest to reduce volatility. Wishart also likes Standard Life's Dynamic Distribution fund, managed by Jacqueline Kerr, even though it currently has a relatively high commercial property element which may reduce performance in the short term but prove a good shelter if shares take a downturn.
For those with a greater appetite for risk, look at JP Morgan Natural Resources, tips Iain Wishart. It invests in commodity firms, such as producers of iron ore, nickel, copper and steel, as well as energy companies. The fund manager, Ian Henderson, has been at the helm for more than seven years.
The more cautious client might prefer to drip-feed their ISA investment through regular contributions, rather than placing it all at one go. After all, few can predict the exact point in any investment cycle.
Two income funds are among those recommended by Alistair Blyth of Edinburgh based AB1 Financial Planning: Jupiter Merlin and Midas Balanced. The former has produced "consistently good returns" which more than compensates for higher fund management charges than some in the sector. Although performance by the latter has slipped slightly over the last six months, the fund has previously been top quartile throughout the last five years and since inception.
Blyth also likes the Midas Balanced Growth fund. A low initial charge of 3 per cent can be obtained by buying through a fund supermarket such as Cofunds or for zero for clients who pay an advice fee.
If a fund manager has several choices within a sector, ask your adviser for their recommendation. Taking continental Europe, which has not yet returned to the higher values seen in the last 12 months, a major asset management house like Gartmore has a good range: European Focus (up 9.2 per cent in the year to end September), European Growth (showing a 9.9 per cent rise) and European Selected Opportunities (showing a 19.2 per cent rise).
Most of the latter's success is the choice of stocks in such countries as Switzerland, Germany and Spain whilst Greece, Germany and Italy feature more prominently as geographical choices for the Gartmore European Growth Fund.
Looking further afield, with Japan continuing to underperform, consider Asian funds that exclude this country. Those that take in India, which is enjoying an amazingly strong market, are likely to be among the winners this year.
