At this time of year, with the annual ISA deadline less than a month away, many people rush to open ISA accounts in order to take advantage of tax breaks. An ISA is an ‘individual savings account’ that enables you to save or invest without paying tax on the interest or investment returns you receive. There are several types of ISAs currently available, including cash ISAs, stocks and shares ISAs and lifetime ISAs.
Given that taxes can reduce your net wealth significantly over time, it makes considerable sense to invest within an ISA, to shelter your investments from the taxman. However, for those considering a stocks and shares or a lifetime ISA, the investment options can be daunting when starting out.
With that in mind, here’s a look at some options if you’re just starting out with your first £1,000 and are unsure where to invest.
A mutual fund is an investment vehicle that is made up of a pool of money collected from many investors. It’s run by a portfolio manager who will invest in a portfolio of stocks on your behalf. Mutual funds are a popular way of investing in the stock market because they remove the stress of having to pick stocks yourself.
There are literally thousands of funds to choose from, and you can choose whether you want to invest in UK stocks, international stocks or plenty of other regions or asset classes. Here in the UK, some of the most popular funds include Nick Train’s UK and Global equity funds, Neil Woodford’s funds and Terry Smith’s Fundsmith fund.
ETF stands for exchange-traded fund. These are securities that track indices such as the FTSE 100 or the S&P 500. They have several key advantages including the fact that they offer very low fees and can be bought and sold like regular shares.
Those new to investing may like to consider a ‘vanilla’ ETF such as the Vanguard FTSE 100 ETF. This simply tracks the largest 100 companies in the UK, giving investors exposure to some of the most well-known companies in the world such as HSBC Holdings and Royal Dutch Shell.
Alternatively, if you’re seeking higher growth, you could consider a FTSE 250 tracker such as the HSBC FTSE 250 Index. This will track the 250 largest companies in the UK, outside the top 100. Over the last five years to the end of February, the FTSE 250 has returned 10.4% per year vs 6.6% for the FTSE 100.
Lastly, another good option and one that I’m a fan of myself, is investment trusts. These are similar to mutual funds but they trade on the stock market and can be bought and sold like regular stocks. Fees are generally quite low, but not as low as ETF fees.
There are many UK investment trusts that have been around for an eternity and have excellent dividend track records. The City of London Investment Trust, the Murray Income Trust and the Edinburgh Investment Trust are three conservatively managed options that could be worth a look if you want to keep things simple.
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Edward Sheldon owns shares in Royal Dutch Shell, City of London Investment Trust and Murray Income Trust. The Motley Fool UK has recommended HSBC Holdings and Royal Dutch Shell B. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.