MONEY COMMENT
Time's Running Out For 2003 ISAs

By Cliff D'Arcy
March 26, 2003

One thing we never tire of at the Fool is singing the praises of Individual Savings Accounts (ISAs). These allow you to invest in cash, bonds, shares and managed funds (insurance ISAs also exist but these aren't terribly popular, for good reasons, so we won't talk about them).

It's important to understand that your 2002/03 allowance for investing in ISAs expires with the end of the Tax Year on Saturday, 5 April 2003. Of course, your 2003/04 allowance kicks in on 6 April but your previous allowance will be gone forever, so watch out and don't lose out!

If you're a wary sort of person and don't want to put your capital at risk, or you're after a secure income, you're probably best off investing in a cash or bond ISA. However, if you believe, as we do, that shares are the best long-term investment, you should consider a shares ISA. If you don't want to pick your own shares, you'll need to invest in a fund. However, we Fools aren't that keen on managed funds (which you'll see advertised very heavily, particularly at this time of year).

In theory, the highly paid and qualified managers of these funds aim to use their experience to beat the market. In practice, three-quarters of them fail to beat a simple index tracker over five years. Over longer periods, the index tracker continues to pull away and beats more than 80% of professional fund managers.

This is simply because the charges on trackers are very low, whereas managed funds usually take 5% or more of your money upfront and 1%-2% every year. Although it's not obvious to everyone that lower charges means better long-term performance, the evidence backs us up.

So, the lower the charges, the less of your money is gobbled up and the better chance you have of matching the market. So, you'd expect an index tracker with no charges to beat almost all other funds, correct? Right, which is why we recommend you take a look at Legal & General's 100% Free 2003 ISA.

Although this is a shameless plug for a Fool advertiser, there are good reasons why we're doing it:

• You don't have to be minted to invest. The minimum monthly contribution is £25 and the lowest lump sum is £500. Perfect for that windfall from Aunty Beryl's bingo win!
• If you invest £500 or more before 30 April and keep your money invested until 31 December, L&G will refund all your 2003 charges to you next February. From 2004, total charges will be 0.53% a year and nothing more.
• Unlike almost all managed funds, L&G's has no upfront charge, so more of your money goes to work on day one. There's also no exit fee when you pull out (many managers include this sneaky sting in the tail).
• It obeys the government's CAT Standards for charges, access and terms (this is a good thing).
• It does what it says on the tin: over the last five years, it's tracked the FTSE All-Share index very closely with little or no error.
• Smart investors have already caught on to this fund – it's now worth £1.8 billion.
• The UK stock market has fallen over the last 1, 3 and 5 years and this fund has fallen with it. However, we think things are looking rosier for the future.

Regardless of its merits, I'd strongly recommend you go away and do your homework before investing in this or any fund. At the very least, read our Plain English Guide To Investment. However, when you come back, I'm quietly confident that you'll appreciate why we Fools like this L&G offer so much....

Learn more at our ISA Centre.