Today we take a look at the two most popular investment options for your ISA allowance, in light of the new £15,240 limit, which came in effect this month (April 6). Despite Treasury’s plans to limit the tax-free interest earnings on ISAs to only the first £1,000 from 2016, the ISA remains one of the most popular investment wrappers for British retail investors. In this article we will explore the strengths and weaknesses of the two most popular investment options when it comes to filling your allowance.
Variety – the vast range of companies’ equity allows for either an extremely varied or a very specialised portfolio, and everything in between, making individual companies an appealing option for investment. An investor who closely monitors a company and comes to a greater understanding of how that business fares in the market over time, will be better able to achieve earnings from an investment. However, investing in individual company shares requires at least a degree of hands-on monitoring and management and an understanding of the stock market, its companies and industries.
Volatility – this trait of stock trading is the strongest deterrent against buying company equity. However, certain industries and companies are less susceptible to volatility, the big utilities companies for example, and investors are able to develop a more diverse and thus a safer stock portfolio, although at the cost of some returns, by balancing steady blue-chips with riskier but potentially higher growth companies.
Hands-off – funds are either actively managed by professionals or track indices, and as such appeal to investors who prefer a less actively engaged approach to their portfolio. Funds often include hundreds of companies and exposure to different markets to diversify risk, though not all funds are fail-safe. Silver-backed exchange-traded funds (ETFs), for example, scored a successful first quarter of 2015, but are still well in the red on an annual basis, as precious metals in general suffer from the stronger dollar.
Costs – investing in actively managed funds comes at a cost, however, as most funds charge as much as 1.5 percent or more per year, a deal breaker for many investors.
For novice investors, funds as opposed to shares are often the more favourable of the two options, as inexperience is likely to erode much of any higher margins which can be gained from individual stock trading. With experience, however, and with the growing analytical capabilities of ever-evolving user friendly share-screening software, private investors are better equipped than ever before. This could make individual companies a more appealing investment option to the experienced investor.
There are also other options, like commodities or forex, but it was real estate that was seen as an appealing option recently, after the Treasury announced a new Help-To-Buy ISA as part of the 2015 Budget. The new ISA
aims to give first time buyers a leg up onto the property ladder by providing a £50 bonus on top of every £200 saved for first time house buyers.