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Choosing a tracker is a fairly straightforward process. You need to look at five things: 1. Charges The lower the better. Most trackers have no initial or exit charge. Few have annual charges of over 1% and some are as low as 0.3% to 0.4%. Be aware though that you may have to pay additional administration charges on top of the quoted annual management charge. You'll find full details of all these charges in the fund's Key Features document, which has to accompany every application. 2. Which index? Most UK trackers follow the FTSE 100 or FTSE All-Share. Both these indices cover shares listed on the London Stock Exchange. The FTSE 100 covers the largest 100 companies by market value. The All-Share covers the top 700 or so. You can also buy trackers that follow European, US or Far East indices. There are even some that track global indices. You can also get funds that track specific sectors like technology, health or telecoms. It's impossible to predict which of these indices will do best. Many people recommend that you diversify your investments internationally but a significant percentage of the profits from UK companies comes from abroad anyway. Consequently a cheap UK tracker following the FTSE 100 or FTSE All-Share is a sensible starting point (of the two, FTSE All-Share trackers are marginally more preferable because they track a larger proportion of the UK market). Trackers that follow more exotic indices tend to be more expensive. However, there is nothing stopping you having a small collection of different trackers, perhaps a different one each year. 3. Type of fund There are various different types of investment funds such as unit trusts/OEICs, investment trusts and exchange traded funds. There are slight differences between how each of these funds work, which are outlined in more detail in this article. 4. Tracking error The tracking error measures how closely a fund tracks its chosen index. No tracker is able to exactly match the index because it is not always possible to buy and sell enough shares at the exact same time that the index changes. However, most funds will be fairly close. Some funds publish their tracking error. In other cases you can estimate it yourself by comparing the performance of the fund against the performance of the index. The difference between the two will be the combination of charges and tracking error. Alternatively, you can always ask the company concerned. In practice, there are few trackers that consistently produce high tracking errors, so this is the least important of the four factors to consider. 5. Should You Get An ISA? The simple answer to this is "almost certainly yes!" Index trackers generally charge you the same whether you buy them inside or outside an Individual Savings Account (ISA). So there's no downside to being in an ISA and you might as well be safe rather than sorry. What's at stake is the capital gains tax on any gains that your tracker makes over the years. You get an annual exemption from capital gains tax, currently £8,200 per year, but if you're investing for the long term, then you'll hope to make gains eventually that exceed this. Of course, the more you put into the index tracker each year, the more likely it is that capital gains tax will eventually become an issue. But, if it costs nothing extra to use an ISA wrapper then, as we've said, you might as well. Higher rate taxpayers will also benefit from not having to pay additional tax on dividends that they receive in an ISA. There are a couple of situations that might depart from this. First of all, if you're saving for retirement, then it might be better to wrap your index tracker up in a stakeholder pension. These have some problems of their own, but they're designed to give you a retirement income safely and, if that's your aim, then there's a lot to be said for them. There's more about the pros and cons in the Pension Centre. If you do decide to go for an ISA, then the first thing to decide is whether you want to go for a 'Mini' or a 'Maxi'. A Maxi can take up to the full £7,000 annual ISA allowance. You can only invest £3,000 into a Mini ISA, but it does then allow you to look elsewhere for a cash Mini ISA, where you can save an additional £3,000 each tax year if you want. You can apply for a tracker today in our tracker centre.