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Have £1,000 to invest? 3 reasons I’d buy FTSE 100 shares instead of opening a Cash ISA

Investing in the FTSE 100 may not be as popular as saving through a Cash ISA. However, it can offer superior returns in the long run.

Part of the reason for that is the prospect of continued low interest rates, while the FTSE 100 appears to offer excellent value for money at the present time.

Furthermore, with large-cap shares offering high income returns that could be double or even triple the current rate of inflation, they may provide improved spending power over the long term.

Interest rates

While Cash ISAs offered relatively attractive returns prior to the financial crisis, a decade of low interest rates means that it is now difficult for them to deliver a positive real-terms return on your capital.

Looking ahead, this situation may persist for a number of years. The UK’s economic outlook is relatively uncertain, and could realistically become even more challenging as political risks are currently high. Coupled with modest levels of inflation, this may dissuade the Bank of England from increasing interest rates over the next few years. The end result could be continued low returns for savers.

Income returns

By contrast, obtaining an inflation-beating income return from the FTSE 100 is not especially difficult at the present time. The index itself has a dividend yield of over 4%, but many of its members offer yields of 6%+. In fact, it would be relatively straightforward to build a portfolio of diverse stocks that together offers an income return which is three or four times the interest rates available on a Cash ISA.

And dividend growth could be relatively impressive across the FTSE 100. Yes, risks such as a global trade war and a weak European economy may weigh on the performances of the index’s members. But, with the long-term prospects for the world economy being relatively positive, it seems likely that large-cap dividends could grow at a fast pace over the coming years.

Buying opportunity

The index’s yield and the uncertainty regarding a trade dispute between the US and China could make now the right time to buy large-cap shares. Its history shows that buying during periods when its price has been negatively impacted by possible risks can prove to be the most effective long-term investment strategy. After all, the index has always recovered from even the most severe economic downturns and bear markets since its inception in 1984.

Therefore, while there is a risk of capital loss that is not there with a Cash ISA, the FTSE 100’s risk/reward opportunity for long-term investors seems to be appealing. It could improve your financial future, as well as offer an inflation-beating income return in the meantime. With it being easier and cheaper than ever to invest in the stock market, now could be the right time to pivot away from a Cash ISA and towards the FTSE 100.

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Peter Stephens has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. 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.