IF YOU want to get the best return on your money and have already put all you can into a cash Isa this year, you may want to consider equity Isas – Isas that invest in stocks and shares.
Equity Isas have a number of advantages over their cash counterparts. For a start, you can put much more money into them – the most you can put into a cash Isa is limited by law to £3,600 in each tax year, but equity Isas allow investments of up to £7,200 a year (£10,200 from April next year).
Then there is the question of returns. Cash Isas pay a predictable rate of interest and you will never lose money, but the returns – especially after inflation is taken into account – can be pretty anaemic. Many are paying about 3pc at present. With shares, on the other hand, there is no upper limit to the capital appreciation (you can also lose money, of course), while in many cases you will also get a regular income.
For example, one of the best performing equity funds over the past year, Neptune Japan Opportunities, has produced a return of about 70pc for lucky investors over that period.
But remember before you start looking at equity Isas that everyone should have a “rainy day” fund in cash – preferably in a high-interest savings account or best-buy cash Isa – to help them cope with unexpected emergencies or shocks such as redundancy.
An equity Isa – or shares owned in any other way – makes a poor emergency fund because you could be forced to sell at a loss. Holding shares for the long term (advisers recommend at least five or even 10 years) means that peaks and troughs are smoothed out and you do not fritter away your investment on dealing charges.
Choosing an equity Isa is less straightforward than finding the best cash Isa, which is just a question of comparing interest rates. But there are a number of rules that can guide you along the way.
Attitude to risk
Before you set out to choose which funds to buy, it is a good idea to think about which type of asset will suit you best. If you have decided to move beyond cash Isas into the equity-based type, you’re already showing an increased acceptance of risk in pursuit of higher returns. But not all share-based funds carry the same …
Read the original article at Telegraph
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