Five easy stocks and shares Isa funds
For the uninitiated, moving into the world of investing can seem a daunting undertaking. The money you squirrel away will be at the mercy of markets and you may not get back what you put in. You also need to be committed, with five years generally cited as the minimum time horizon.
However, history shows that investing is likely to deliver positive returns over a five- to 10-year period and it can help your cash stay ahead of inflation, the ‘silent assassin of savings’, leaving you with real purchasing power over the long run. If, for example, you had been brave enough to invest in the UK market at the nadir of the financial crisis, in March 2009, you would have since enjoyed a 120% gain.
First, ask yourself what you want to achieve: are you investing for long-term growth, income, or a combination of both? Do you have a monetary target? Are you saving up for a deposit for a property in a few years’ time or maybe university fees for children? Having a broad investment plan should help you decide not only how much money you are willing to invest, but also what level of risk you are prepared to take.
- Read our Beginner's guide to investing.
Given that the annual individual savings account (Isa) limit is £15,240, rather than throwing a large lump sum into the market, you are better off drip-feeding money in on a monthly basis; this way, you are limiting the impact of any market falls on your capital. If you invested just £100 a month, after 10 years, assuming average growth of 5% a year, you would be sitting on an investment worth some £15,000.
Danny Cox, a chartered financial planner with Hargreaves Lansdown, says: “First-time investors should not go overboard with risk. This means avoiding overseas and specialist funds. They should stay close to home and invest in a solid, blue-chip UK equity fund to provide a solid core.”
We highlight five funds to help get you started.
HSBC FTSE All Share Index
Gavin Haynes, managing director at wealth manager Whitechurch Securities, believes first-time investors should consider a basic UK tracker fund. Such products, sometimes referred to as passive funds, are essentially run by a computer programme and merely track a particular market, such as the FTSE 100.
There is no professional fund manager in the driving seat picking shares on your behalf, so your capital will rise and fall in line with the market. Mr Haynes says: “Tracker funds are the lowest cost and simplest way to gain stock market exposure.”
For novice investors, he recommends the £962 million HSBC FTSE All Share Index fund, which looks to replicate the performance of the broader UK market. Over the past five years, it has delivered a total return of 20% and because it is a tracker fund, it comes at a bargain price, with an annual ongoing charge of just 0.07%.
Fidelity Index World
Martin Bamford, a chartered financial planner at Informed Choice, suggests another passive fund, Fidelity Index World. In this case, the £265 million portfolio aims to deliver long-term capital growth by closely mirroring the performance of the MSCI World Index, which tracks stocks globally.
Given its worldwide remit, the fund has investments in some of the planet’s biggest household names, including technology giants Apple and Microsoft. Originally launched in December 2012, over the past three years it has achieved a total return of 28% to its investors.
Mr Bamford believes with its “very low” annual ongoing charges of 0.15% that it not only offers value for money but “good diversification across different equity markets worldwide”.
CF Woodford Equity Income
Among actively managed funds, which are run by professional fund managers who aim to beat stock market performance, Mr Haynes picks CF Woodford Equity Income fund as a good option for novice investors.
This fund is run by one of the UK’s most celebrated investors, Neil Woodford.
During the 25 years when he ran the Invesco Perpetual High Income fund, he managed to turn a £10,000 investment into £230,000. MrWoodford focuses on delivering income alongside capital growth by investing in UK dividend-paying firms, in other words corporations that share their profits with their investors.
His latest venture only launched in June 2014, but is already more than £8.3 billion in size, and has since delivered a total return of 15%.
Mr Haynes says: “The manager has an exceptional track record and the fund provides a good core holding of UK blue-chip- focused shares, with an annual fee of 0.75%.”
Jupiter High Income
Another alternative, which Mr Bamford believes offers decent diversification, is Jupiter High Income. This fund, like the Woodford fund,aims to deliver a high and rising income stream as well as capital growth to its investors and carries a historic dividend yield of 4%.
Co-manager Alastair Gunn has a “value” bias where he seeks out companies, which he believes appear under- rated by the market. Launched in 1996, today it counts HSBC, Vodafone and pharmaceutical group AstraZeneca among its top holdings and, over the past five years, the vehicle has delivered a total return of 39% to its investors.
Mr Bamford says: “It has a 20-year track record and has delivered consistently good performance.
Its annual ongoing charge at 1.05% is higher than a typical index tracker fund but the fund group manages to add value through selecting modestly valued companies with a good track record of growing profits.”
F&C MM Navigator Distribution
For investors looking for globally diversified ready- made investment portfolio, Scott Gallacher, a chartered financial planner with Rowley Turton, recommends the £1.1 billion F&C MM Navigator Distribution fund.
This portfolio is a fund of funds in that it invests in other investment vehicles with the aim of spreading risk. Its objective is to provide income with some capital growth by investing in a wide spread of UK and international funds, which invest in both shares and bonds.
Mr Gallacher says: “Fund managers Rob Burdett and Gary Potter run the portfolio on a fairly defensive basis. I understand they regard this as ‘the fund for their mother-in-laws’ – they are very keen on the fund not losing significant money.”
As it invests in a range of funds it comes with a higher price – the annual on-going charge is 1.47% – but it boasts a decent historic income yield of 4.6% and over the past five years has returned 24%.
You can also read our guide to the best cash Isas available, updated on a weekly basis.
All performance to 20 January 2016. Source: FE Analytics.
The term is interchangeable with stock exchange, and is a market that deals in securities where market forces determine the price of securities traded. Stockmarket can refer to a specific exchange in a specific country (such as the London Stock Exchange) or the combined global stockmarkets as a single entity. The first stockmarket was established in Amsterdam in 1602 and the first British stock exchange was founded in 1698.
Also known as index funds, tracker funds replicate the performance of a stockmarket index (such as the FTSE All Share Index) so they go up when the index goes up and down when it goes down. They can never return more than the index they track, but nor will they lose more than the index. Also, with no fund manager or expansive research and analysis to pay, tracker funds benefit from having lower charges than actively managed funds, with no initial charge and an annual charge of 0.5%.
The general term for the rate of income from an investment expressed as an annual percentage and based on its current market value. For example, if a corporate bond or gilt originally sold at £100 par value with a coupon of 10% is bought for £100 then the coupon and the yield are the same at 10%, or £10. But if an investor buys the bond for £125, its coupon is still 10% (or £10) and the investor receives £10 but as the investor bought the bond for £125 (not £100) the yield on the investment is 8%.
An increase in the general level of prices that persists over a period of time. The inflation rate is a measure of the average change over a period, usually 12 months. If inflation is up 4%, this means the price of products and services is 4% higher than a year earlier, requiring we spend and extra 4% to buy the same things we bought 12 months ago and that any savings and investments must generate 4% (after any taxes) to keep pace with inflation. Since 2003, the Bank of England has used the consumer prices index (CPI) as its official measure of inflation (see also retail prices index).
A market-weighted index of the 100 biggest companies by market capitalisation listed on the London Stock Exchange. It is often referred to as “The Footsie”. The index began on 3 January 1984 with a base level of 1000; the highest value reached to date is 6950.6, on 30 December 1999. The index is “weighted” by how the movements of each of the 100 constituents affect the index, so larger companies make more of a difference to the index than smaller ones. To ensure it is a true and accurate representation of the most highly capitalised companies in the UK, just like football’s Premier League, every three months the FTSE 100 “relegates” the bottom three companies in the 100 whose market capitalisation has fallen and “promotes” to the index the three companies whose market capitalisation has grown sufficiently to warrant inclusion. Around 80% of the companies listed on the London Stock Exchange are included in the FTSE 100.
An individual employed by an institution to manage an investment fund (unit trust, investment trust, pension fund or hedge fund) to meet pre-determined objectives (usually to generate capital growth or maximise income) in prescribed geographic areas or investment sectors (such as UK smaller companies, technology or commodities). The manager also carries the responsibility for general fund supervision, as well as monitoring the daily trading activity and also developing investment strategies to manage the risk profile of the fund.
If you own shares in a company, you’re entitled to a slice of the profits and these are paid as dividends on top of any capital growth in the shares’ value. The amount of the dividend is down to the board of directors (who can decide not to pay a dividend and reinvest any profits in the company) and they will be paid twice yearly (announced at the AGM and six months later as an interim). Dividends are always declared as a sum of money rather than a percentage of the share’s price. Although dividends automatically receive a 10% tax credit from HM Revenue & Customs (HMRC), which takes the company having already paid corporation tax on its profits into account. Dividends are classed as income and, as such, are liable for personal taxation and so shareholders have to declare them to HMRC.
Invidivual Savings Accounts were introduced on 6 April 1999 to replace personal equity plans (PEPs) and tax-exempt special savings accounts (TESSAs) with one plan that covered both stockmarket and savings products, the returns from which are tax-exempt. The ISA is not in itself an investment product. Rather, it’s a tax-free “wrapper” in which you place investments and savings up to a specified annual allowance where the returns (capital growth, dividends, interest) are tax-exempt (you don’t have to declare ISAs and their contents on your tax return). However, any dividends are taxed within the investment, and that can’t be reclaimed.