Investment funds have enjoyed their strongest Individual Savings Account (Isa) season in nearly a decade. Sales of stocks and shares Isas soared in March as savers were eager to use up their allowance before the end of the tax year. About £349m was paid in between 1 March and 5 April this year – more than double the amount in the same period last year.
Given the pathetic interest rates available on savings accounts at the moment – there isn’t a single standard high-street account that beats inflation – it seems hardly surprising that savers are turning to the stock market. After all, the FTSE 100 is up about 70% since it bottomed out in 2009, and dividend yields on many stocks are higher than anything you can get from a bank.
So, “despite the squeeze on finances, more and more people are attracted by the tax-free wrapper that investment Isas offer, and the potential for growth, rather than leaving their savings sitting idly in a low-interest bank account,” says Alan Easter, a director of discount broker Willis Owen, in The Sunday Telegraph.
But it’s vital to remember that if you can’t afford to risk your capital, then you mustn’t use the stockmarket as a substitute for a savings account, regardless of how tempting it is. If you put your money into a bank or building society via a cash Isa, the worst that can happen (so long as the amount is covered by the Financial Services Compensation Scheme – up to £85,000 per person) is that it will lose purchasing power thanks to inflation. Invest your money in a stocks and shares Isa and you risk losing your initial capital if the value of your investments plunge.
It’s particularly important to be wary now. A flood of retail investors getting back into stocks is often a sign that markets are due for a correction. If you are only saving for the short term – for a deposit on a house, for example – the stockmarket is not the place to be. Try NS&I’s tax-free index-linked savings certificates, which guarantee to beat inflation for up to five years.
If you have a longer-term goal, such as retirement, an Isa may be a good bet. But watch out for fees. The most popular Isa funds include Invesco Perpetual High Income, which charges an initial fee of 5% if you buy direct plus annual charges of 1.5%. Instead, invest via a fund supermarket such as Hargreaves Lansdown, Cofunds, or Cavendish Online and you can slash such fees. Better yet, consider investment trusts such as the Edinburgh Investment Trust (LSE: EDIN) instead, or a passive market tracker such as an exchange-traded fund.