As 5 April, the end of the tax year approaches, many GPs will be considering topping up their investments in individual savings accounts (ISAs) to maximise their annual allowance. In the 2006/07 tax year, you can invest up to £4,000 in a mini investment ISA alongside up to £3,000 into a cash ISA or up to £7,000 in a maxi investment ISA.
ISAs are a popular investment because of the tax breaks: there is no income tax or capital gains tax to pay when you cash in. Many GPs may have invested in equity (share-based) ISAs and before them, personal equity plans (PEPs) over a number of years with different fund managers. If so, the amount of correspondence you receive each year could represent a small rainforest. Also, keeping track of each individual arrangement becomes increasingly difficult. The solution could be use to a fund supermarket.
What is a fund supermarket?
A fund supermarket is an administrative platform that provides a convenient way of investing in collective investment funds. A variety of funds can be purchased from a number of different fund management groups. The bigger UK fund supermarkets provide access to over 800 funds from more than 50 financial institutions. You can also re-register your existing holdings on the platform, often at no cost.
What are the pros?
GPs will have the flexibility to invest lump sums or regular contributions with more than one fund manager in any tax year. You can hold your entire investment portfolio in one place so that you only have to deal with one administrator.
Investors can switch quickly and cost efficiently between funds within ISAs (and PEPs). You can also switch investments made directly into unit trusts to different funds operated by the same manager. The supermarket will send you consolidated statements showing the total value of all your investments. You can obtain up-to-the-minute valuations too.
And the cons?
Although many funds offered through some supermarkets have low initial charges, you almost always have to pay an annual charge. In some cases this is higher than dealing with the fund manager directly. Some supermarkets can only process lump sum investments online. Others require a paper-based application.
Also, some only provide an ISA platform, so you have to find an alternative for PEP and direct fund investments. Some operate a tiered charging or double charging system.
Also, some that are tailored for the DIY investor provide on-line search tools and but are unable to give individual advice.
What about investment strategy?
Are you investing to make your money work harder than it would in a cash-based environment or do you have a specific goal such as retirement or university fees? With a goal to meet, determine how much capital or income you need in future, allowing for inflation.
Decide how much investment risk you are prepared to tolerate. Assuming specified growth rates and investment charges, you can calculate how much money you need to invest as a lump sum or regular contribution.
Decide how long you can invest for. When investing in equity funds, you should take a five-year minimum view for lump-sum investments and an eight-year view for monthly contributions.
Which types of fund?
Deciding the right combination of investments is probably the most important part. The major asset classes of cash, fixed bonds, property and shares should be balanced to meet your risk profile and investment objective. Next, decide which sub-class within each class is for you. For instance equity funds could be in different geographical sectors.
Is DIY investing for me?
Amateur investors may be happy to find a fund supermarket and select new funds to invest in. Otherwise, an independent financial adviser (IFA) can do this for you on a commission or fee basis.