Over the long-term, returns from stock market investments have consistently outperformed cash. We look at stocks and shares ISAs.
Savers have just a few weeks left to make the most of this year’s ISA allowance.
So you need to act now to shelter your hard-earned cash from the taxman before 5 April.
Cash ISAs are popular with savers as there is no risk to your money, no fees or charges and any interest earned is free of income tax.
But with inflation running high and interest rates remaining at a record low of 0.5 per cent, many people are experiencing negative real returns on their cash savings.
So more are turning to stocks and shares ISAs, which let you put your money into a range of stock market investments, in order to see their money grow.
You can place all of your annual tax-free allowance of £10,680 in a stocks and shares ISA, or you can split it so you hold £5,340 in investments and £5,340 in cash.
What about risk?
As stocks and shares ISAs are stock market investments there is a risk you could lose money, but over the longer-term, investments have provided a better return than cash.
Andy Parsons, of stockbroker The Share Centre, says: "Volatile markets may have left some people wary of investing.
"But it is worth bearing in mind that over the longer term returns from equity-based investments have consistently outperformed cash."
That said, experts also advise against investing in equities for any period less than five years.
Think long term
Patrick Connolly, of independent financial advisers AWD Chase de Vere, says investing for the longer-term means a period of "at least five years, although ideally 10 years or more".
He adds: "Those investing for a shorter period should stick with cash as they may not have the time to claw back any short-term losses if they are invested in shares and the stock markets fall."
As an investor, it’s important not to base investment decisions on short-term performance figures or market sentiment.
"All asset classes – and most investment funds – have periods when they perform well, and periods where they perform badly,” says Connolly.
"Many investors make the mistake of selecting funds that have produced strong short-term returns.
"But rather than looking at performance figures in isolation, it is important to understand why a fund has performed well or badly, and if that is likely to change."
How do the figures stack up?
Investors who put the maximum amount into a stocks and shares ISA since they were launched in April 1999 and who have seen average annual growth of 5 per cent, would have £138,057 today, according to figures from AWD Chase de Vere.
Investment funds are less risky than investing directly in individual companies because they typically spread money between about 50 stocks.
When choosing a fund, the key is to find the one which best matches your long-term goals.
"The thing to think about is your risk tolerance," says David Jeal from stockbrokers Selftrade.
"Your decisions depend on how much risk you want to take in order to get a potentially higher return."
Beware of charges
When putting money into an investment fund, you will need to be aware of charges.
There is usually an initial charge to buy into the fund, and also an annual management charge.
As an investor, the key is to achieve a balanced portfolio including both higher and lower-risk investments.
Monitor your funds
Having invested in a stocks and shares ISA, also known as an investment ISA, you need to monitor how it is doing on a regular basis.
Some advisers recommend checking at least twice a year.
While it’s important not to lose sight of the fact you are investing for the longer-term, if you’re not happy with the performance and your fund consistently loses money over three years compared to rival funds, be prepared to move elsewhere.
Finally, the new tax begins on 6 April, when the Isa allowance increases to £11,280.
But don’t wait until the end of the tax year to open your new ISA, as you’ll miss out on up to 12 months of tax-efficient growth and income.
For low- to medium-risk investors, Parsons from The Share Centre picks out Invesco Perpetual High Income fund, while for medium-risk investors he picks out the State Global Listed Infrastructure fund.
For higher-risk individuals, he picks out JPM US Equity Income fund.
Edward Johnson, from discount broker Willis Owen, picks out Jupiter Merlin Income Portfolio for investors seeking to hold a well-diversified portfolio of income-producing funds.
Johnson also picks out Investec Global Energy Fund for investors looking for attractive returns over a longer-term.
For cautious or nervous investors, Connolly picks out Cazenove Multi Manager Diversity.
For other investors, his fund picks include AXA Framlington UK Select Opportunities, JPM Emerging Markets, Fidelity Moneybuilder Income, and Newton Global Higher Income.
Find out more
Confused.com has teamed up with investment broker TQ Invest to give you access to low cost investment funds.
Visit our stock and shares ISAs page to find out more.