Here's the lowdown on the best investments for your stocks and shares ISA.
The ISA is my favourite tax break. It’s a nice and simple way to shelter your savings from the tax man.
If you want to take the low risk approach, you can shelter your money in a Cash ISA. But if you fancy investing in the stock market, a stocks and shares ISA is a very attractive option. If you use an ISA, you don’t even have to tell HMRC that you have stock market investments, let alone pay tax on any profits. And you can invest up to £10,200 a year!
The best stocks and shares ISAs also give you lots of freedom as to where you invest your money. You can pick from a vast range of investment funds as well as the majority of shares on the London stock market.
I’m not going to look at individual shares in this article but I am going to highlight some of my favourite funds as potential picks for your stocks and shares ISA.
Trackers
I’m a big fan of index tracker funds. They’re the simplest and cheapest way to invest in the stock market. Instead of paying an expensive fund manager to pick shares for a fund, an index tracker just follows the movements of a particular stock market index. So if the FTSE-100 rises by 20%, a FTSE-100 tracker should also rise by roughly 20%. Annual charges are low – normally 0.5% a year or less.
You can buy funds that track a wide variety of indices, but the obvious ones to go for are the FTSE All-Share index in the UK as well as the S&P index in the US.
Find out more about index trackers in Six great reasons to choose an index tracker and Top 10 index trackers.
Beating the market
Some people really dislike trackers. Their beef is that trackers are never going to perform better than the index they track. And that’s true, trackers will never beat the market. Trouble is, the majority of actively managed funds - where shares are picked by a manager – don’t beat the market either.
Still, the temptation to try and pick a market-beating fund is strong and I’m afraid I’ve succumbed myself. So let’s look at three of my favourite actively managed funds – all of which could go in your stocks and shares ISA.
Edinburgh Investment Trust
The Edinburgh Investment Trust primarily invests in UK shares and is managed by Neil Woodford who has an exceptionally strong record as a fund manager. He steered clear of internet shares in the late 90s and then avoided bank shares in the run-up to the financial crisis of 2008. His investment trust hasn’t performed so well over the last year or so, but his track record suggests that things will come good eventually.
One of the advantages of investment trusts is that the share price of the trust is often lower than the value of the underlying assets in the trust. If that happens, the trust is trading at a ‘discount.’ Sadly, the Edinburgh Investment Trust is only trading at a 2% discount. Normally, I’d only want to invest in a trust with a larger discount, but when the manager is as good as Neil Woodford, you have to pay for quality.
Templeton Emerging Markets Trust
I’m in no doubt that emerging markets such as China and India will be the fastest-growing economies over the next 20 years, and there’s a good chance that their stock markets will be the fastest-growing too.
The Templeton Emerging Markets Trust is a great vehicle for investing in these markets. It’s a large fund with a solid track record and it’s currently trading at an attractive 8% discount to the asset value.
GLG Japan CoreAlpha
Japan’s stock market has been a very poor performer over the last 20 years, but that may be about to change. Japan’s economy has been held back by several periods of deflation (falling prices) over the last 20 years. Inflation now looks set to rise and that could boost the economy and the fortunes of some of Japan’s big companies such as Sony. Many of these companies look cheap on normal valuation ratios.
You can easily invest in Japan via an index tracker but if you’d prefer an actively managed fund, I’d go for the GLG Japan CoreAlpha fund. It’s a top-performing fund run by experienced managers.
I’ve only had space to look at three possible investments for you. If you want more investment ideas for your Isa, check out this Select List. Fund experts at Fidelity have produced a list of their favourite funds from a wide variety of providers.
Risk
Before you make your final investment decision, I really should stress that investing in the stock market is not risk-free. Especially if you’re investing in Japan or emerging markets. You could see the value of your shares tumble one year and soar the next. And you might end up losing money in the end – even if you stay invested for five years or more.
How to invest
If you want to invest in a managed fund, make sure you do so via a fund supermarket such as Hargreaves Lansdown or The Share Centre. They’ll give you discounts on the initial charge for many funds. Amazingly, it works out cheaper to buy a fund from a supermarket rather than buying direct from a fund management company.
The fund supermarkets will also let you set up a self-select isa. You can then choose the funds and individual shares that you want to go in your stocks and shares ISA.
If you decide to invest in the stock market, good luck!
More: Top new ISAs for savvy savers | Banks don’t know their ISAs from their elbows
Ed owns shares in Edinburgh Investment Trust and Templeton Emerging Markets Investment Trust.