Investment company advertising goes into overdrive during so-called ‘Isa season’ at the end of the tax year, when investors are bombarded with claims about market-beating returns and star managers.
With just over two months left to make the most of your annual allowance for Isas and other tax-efficient investments, here are five tips to help you block out the marketing noise and make sure you get the most from your portfolio.
1. Use your tax wrappers
For the 2013-14 tax year every adult has an Isa allowance of £11,520, up to half of which can be saved in a cash Isa. However, the other half, or all of your allowance if you are happy with the additional risk, can be invested in a stocks and shares Isa.
If you buy your funds within this wrapper, you won’t have to pay any capital gains tax on any profits. Dividends, which are paid net of basic rate tax, incur no further tax within an Isa if you are a higher rate tax payer and interest from bond funds is tax free.
Sipps, like other pensions, attract tax relief, but unlike some schemes they also give you the flexibility to invest in almost any combination of funds.
2. Look beyond high profile funds
Some high profile funds attract attention because of their impressive track records, but other more mediocre offerings can be thrust into the limelight by investment companies with large advertising spends.
Finding the former while avoiding the latter isn’t always easy but it could make all the difference to your portfolio. To help you get started, have a look at our guide to unit trust and open ended investment company (Oeic) funds.
Another type of fund, the investment trust, tends to operate under the radar and is also worth considering. There are often additional risks with trusts, but they have also tended to offer superior long-term returns.
3. Don’t pay over the odds in charges
High charges, compounded over time can have a big impact on returns. Actively managed unit trust and Oeic funds have traditionally charged between 1.5% and 2% but under new regulations these funds are set to reduce their charge to around 0.75%. Part of the difference will be made up by an additional separate charges levied by fund supermarkets.
One option for the cost-conscious, is to invest in index tracking, or ‘passive’, funds. These are designed to track the performance of an index like the FTSE 100. There is no fund manager to pay so they charge less, with the cheapest less than 0.1%.
4. Review your portfolio regularly
A sensible first step when investing is to consider asset allocation. Having a spread of funds, investing in a range of geographical areas or sectors of the economy, will provide balance and help you hedge your bets. But as some areas outperform, and others struggle, your portfolio will stray from its original proportions, so it’s important to review at least once a year.
5. Consider financial advice
Most investors, especially when large amounts of money are involved, prefer to invest with the aid of a professional. A financial adviser can help you establish a suitable asset allocation for your objectives and attitude to risk, and recommend funds to fill each area. Find out more in our guide to financial advice