Equity Isas: time for take off?

As we approach the end of the tax year, now is that time when Isa companies hype up their products and spend their time telling us now is the time to think about setting up an Isa or boosting those you are in possession of.

Certainly, Isa companies would be extremely grateful to you if you did, as it seems investors are choosing to avoid Isas for the first time since their creation, when they replaced Peps and Tessas. Some reports suggest Isa take-up is down 40% on last year.

Since the launch of Isas, this critical time of year – known as the Isa season – has witnessed a frenzy of activity as investors rush to use up their £7,000 tax-free allowance before 6 April – but this year is different.

Put off by poor results over the last two years, investors are deciding not to sail through the choppy waters of Isas – and in particular those that are linked to the stock markets.

Although many people are disappointed with their shares – and this includes many of those held in big name companies, such as Marks & Spencer and British Airways – there are plenty of experts who believe now is an excellent time to buy. It is impossible to predict the bottom of the market, but valuations are low and, in some cases, already starting to rise.

However arguably there has never been a better time to embrace these markets, for those looking to take a longer-term view. But the question is whether or not to invest in the equity markets; after all, with prices falling, the cost of individual units should be far less than they have been. If you take the view of long-term investment then now is a good time to be investing.

It is easy to sell Isas to punters when the markets are at the top of their game, but apparently this is not so when their performances dip.

The trouble with many potential Isa investors is that they are a conservative bunch to say the least and easily scared off.

The old Wall Street adage of buying low and selling high doesn’t seem to apply to the Isa world, but this is what investors ought perhaps to be looking at. Invest in what is not in fashion, particularly as there are signs that corporate performance is starting to improve, especially in the US.

Looking forward to sales of Isas this year, it is likely we will see limited activity and low take-up rates, with IFAs continuing to see a downward pressure on charges, with returns only making it into the single figures – if you are lucky.

For the days of 20-30% per annum gains appear to be long gone. But fund managers are starting to hint at the positive signs they are seeing in the equity markets, but then as IFA Keith Scott, says: ‘If they weren’t positive nobody would buy their funds.’

In order to capture the mood of the market, many managers are launching what they describe as cautious range of products. These may include a bond with a high mix of bonds and a low mix of higher yielding equities.

Small investors are also picking funds from the UK all companies sector and shunning Japanese and UK smaller companies funds.

Investors contemplating their Isa investments on chilly platforms should simply remember that any investment now offering a double-figure income will carry some risk.

With the stock market still in the doldrums it is hard to drum up much of a story about share-based funds.

But there is a whole army of people out there desperate to improve the income they receive from their investments when interest rates on deposits are sinking to low single figure levels.

In most cases, individual shares are a worse buy for smaller investors.

The cost of dealing, even online, means you are unlikely to make any profit.

For those who only want to invest a set amount each month – say £50 – it makes far more sense to put this into a managed fund – essentially a pool of money managed by a fund manager. You have a choice of unit trusts, open-ended investment companies (OEICs) and investment trust funds.

Managed funds, where shares are hand-picked, have higher charges than tracker funds, which are run largely by computers and follow indices.

However, tracker funds tend to be the cheapest and safest option for those who want to buy direct.

IFAs are now also focussing on how much their clients can afford to lose – and have changed the way they question customers. Many people burned by high-risk technology offerings were lured by previous years’ returns, and were not thinking about the balance of their portfolio.

IFA Jason Hollands of Best Investment, says: ‘Before expanding a portfolio investors should look at their existing holdings before introducing new funds.

‘The key to deciding where to invest in the future depends on how cautious or aggressive you feel. If you are aggressive, maybe you should ensure you have the right exposure in Europe and the US, not just in the UK – and review your options every year.’

With the delays on trains being what they are, readers of the advertisements will certainly have the time, but anecdotal evidence suggests double-digit headlines have stuck in investors’ minds.

That doesn’t necessarily mean now is a bad time to invest in the equities markets.

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