Achieve your investment goals

Abigail Montrose help you devise the best investment strategy for you.

Investing in an Isa is simple, but with hundreds to choose from, how do you decide which is best for you? The key is to not think of it in isolation but as part of your overall financial planning. Before even considering an Isa you need a basic financial safety net in place. The next step is to develop an investment strategy and this will help you decide which Isa, if any, to invest in.

Everyone needs an emergency fund. This is cash you can dip into immediately if necessary, such as if you lose your job or the boiler needs replacing. Some experts say this should be equivalent to three months wages, others suggest more.

This cash should be in a high-interest savings account which offers instant access. If these are the only savings you have, then consider a cash Isa as the interest you earn on your money will be tax-free. But if you use up your cash Isa allowance remember it will affect your other Isa allowances for the year.

Developing an investment strategy

Once you have your emergency fund in place, you can develop an investment strategy. First decide on your short-term and long-term aims. Short-term goals may include saving up for a deposit on a home over the next three to four years, while long-term goals may include saving for your children's university education in 15 years' time or for when you retire.

Clarifying your objectives helps determine what sort of investments might be appropriate and indicates how much risk you can take. For example, if you need access to your money in the next five years, avoid equities (company shares) stick to a deposit account or cash Isa where there is no risk to your capital.

Higher-rate taxpayers who know when they might need their cash and who do not want to take any risk with their capital should also consider National Savings index-linked and fixed-rate Certificates. The three-year index-linked Certificates pay 1.1 per cent above inflation and the return is tax-free. So if inflation is 3 per cent the return would be 4.1 per cent. A higher-rate taxpayer would have to earn 6.83 per cent gross on their savings to match this.

Investments which involve risk but offer a potentially higher return, should only be considered by those who can invest for at least five years. Most people opt for unit trust, open-ended investment company (OEIC) or investment trust funds. These collective funds pool investors' money and invest it in a wide spread of assets such as different equities and fixed-interest securities (government or corporate bonds which pay a fixed annual return).

Your attitude to risk will play a large part in your choice of investments. As Vivienne Starkey, managing director of London-based IFA firm Equal Partners points out: "It is what ever makes you sleep well. If you are not comfortable with your investments going up and down in value, then stick to cash," she advises.

In general, the shorter the period to when you need your money the less risk you should take. Also consider how much you can afford. If you are paying into a good pension scheme, have a high level of savings and other assets, then you might be prepared to take more risk than someone in not so fortunate a position. And if you need an investment to provide extra, you may want to avoid a fund where the level of income can fluctuate.

Your age, future financial prospects and existing investments will also affect your choice. As your circumstances change so should your investment portfolio. Initially, aim to build up a well-balanced portfolio with
exposure to different types of assets including cash, equities and fixed-interest securities. A well-diversified portfolio spreads your risk and means you should benefit from good times on the equity markets or when
interest rates are high and cash is paying well.

Next look at the most tax-efficient way of holding these investments and for most people this is likely to be Isas and pensions.

"The beauty of Isas is that over the long-term you can build up a portfolio without any further tax charges when you take money from them. You want to end up with a broad-based portfolio. You don't want all your eggs in one basket. Don't go for the flavour of the month when choosing an Isa but look at your whole portfolio and look for a fund that either fills a gap or sits neatly in your overall portfolio," advises Starkey.

The first-time investor

Your first step into the investment world should be tentative. Stick to broad-based funds which offer diversification to lower risk and which can act as a core holding to build your portfolio around. For a first investment into equities, Patrick Connolly, research and investment manager at John Scott & Partners, suggests a tracker fund such as the Liontrust top 100 fund. The holdings in this fund fully replicate the FTSE 100 index, there is no initial charge on the fund and the annual management fee is just 0.2 per cent, Alternatively, consider the Lazard UK Alpha fund. Although this only invests in the shares of 50 companies, these are all large and solid companies, says Connolly.

Another equity fund worth considering is the Invesco Perpetual High Income fund, says Adrian Shandley, managing director of national IFA firm Premier Wealth Management. But for even more diversification, consider a distribution fund, he suggests. Distribution funds must have a minimum of 40 per cent of their assets invested in gilts and bonds and up to 60 per cent in equities at any one time. But they can vary their holdings within these limits to take advantage of market trends, says Shandley. He likes the distribution funds run by New Star and by Jupiter.

"As a first-time investor you do not want to put your money at undue risk. With a distribution fund you get all the main asset classes in one fund. These funds also generate a reasonable level of dividend income so if the market is flat you'll still get a reasonable return," he says.

Another way to achieve a high level of diversification is through a multi-managed fund. Rather than investing directly in the shares of individual companies, these funds invest in other fund managers' funds.

"If you don't want to choose and manage your investments yourself, consider a multi-manager fund where a professional fund manager will invest in lots of funds for you. Although there is an element of double charging as the
managers are buying other funds, they are often able to buy into these funds at a very low price not available to ordinary investors," says Starkey.

For the lower-risk investor Starkey likes Jupiter Merlin Income Portfolio Trust which has around 59 per cent in equity funds managed by the likes of Artemis and Cazenove, and a further 32 per cent in fixed interest funds managed by the likes of Fidelity and Framlington. Those looking for a medium-risk multi-managed fund should consider Jupiter Merlin Growth portfolio trust which has a more global content, says Starkey.

Experienced investor

The more seasoned investor is likely to already have a number of investments in their portfolio. Ideally, these should have been carefully selected and reviewed over the years to compliment existing holdings and balance the portfolio in favour of current aims and circumstances. In reality, most investors add to their portfolios on a piecemeal basis often opting for funds that were the flavour of the month or doing well at the particular time they were looking to invest.

This type of investor should ideally have a well-balanced portfolio which might include around 50 per cent in UK equity funds spread primarily across large companies as well as medium and smaller companies. Ideally there should be some exposure to global funds and then funds which cover the other asset classes including fixed interest and commercial property. The exact balance will depend on attitude to risk and any other investments held.

One of the best ways to decide what Isa to invest in is to look for gaps in your portfolio.

Investors aiming for capital growth should not ignore equity income funds. As Shandley points out: "For balanced growth you also need exposure to income funds as these often have provided a better total return through dividend reinvestment," he says.

Shandley likes the Newton Higher Income and Schroder income funds. He also favours Rathbone Income as does Starkey for lower-risk investors seeking capital growth. For those looking for a medium risk fund she likes Framlington Equity Income.

Those looking to beef up their exposure to UK smaller companies should consider First State British Smaller companies, says Connolly. For those wanting a fixed-interest fund he suggests Legal & General's Fixed interest Fund which invests in good quality corporate bonds and gilts. For fixed interest funds with a more global remit Shandley recommends Newton International Bond Fund and Aegon Global income.

For those with no overseas equity exposure in their portfolio Connolly suggests splitting your annual Isa allowance between three funds, such as Cazenove European, JPMF US fund and First State Asia Pacific Leaders. You can invest in all three via a fund supermarket such as Fidelity Funds Network or Cofunds.

Shandley is not so keen on the Far East. "If you want to increase the predictability of return avoid the Far East markets as these are unpredictable and tend to be on a different economic cycle to the West," he says.

For US exposure Shandley favours Schroder US Smaller Companies and for Europe he likes Rathbone Special Situations and Jupiter European Special Situations because "It's a stockpicker and only chooses stocks it wants to hold and does not pay attention to geographical boundaries".

The older investor seeking income

Income-seekers need to be clear about how much income they need as this will affect how much risk they can take and which investments will be best for them. In general, the older an income-seeker is the less-risk they should take and so the greater their exposure should be to fixed-interest securities such as bonds.

"They say the golden rule is you should hold your age in bonds. So if you are 70 you should have 70 per cent of your investments in bonds and if you are 80 you should have 80 per cent," says Shandley.

One of the plusses with bond funds is that the return on the bonds is classed as interest and not dividends. This means there is no tax to be paid within the Isa which means these funds can provide a higher income.

In general, the higher the yield on a bond fund the more risk there is likely to be. Higher yielding funds often behave like equities which older investors may want to get away from, says Connolly. He likes Legal & General Fixed Interest fund and Schroder Gilt and Fixed Interest fund which currently offer yields of around 4.8 per cent tax-free in an Isa.

For yields of between 5 per cent and 7.5 cent Shandley recommends F&C Strategic Bond fund, Newton International Bond fund and Invesco Perpetual Monthly Income fund.

"There is little capital growth with these funds and as with all bond funds your capital is at risk. These funds do not respond to equity markets. But if interest rates rise, bond fund values go down. But when interest rates fall the capital value can go up," he says.

While older income seekers may look to bond funds to reduce their levels of risk and to provide a good income, this does not mean they should totally ignore other asset classes.

After you have invested your age in bond funds, Shandley recommends having the remainder of your portfolio in high income equity funds such as Newton Higher Income, Schroder Income and Invesco Perpetual High Income.

Another option is property funds, says Starkey. "I like New Star Property. Most people do not consider property funds when looking for income. The aim of this fund is to provide a high income together with some growth of both income and capital. It invests in commercial property, property- related assets, government and other public securities," she says.

Starkey also likes Invesco Perpetual Monthly Income Plus which invests in high yielding government bonds and some UK equities. The current yield is around 6.1 per cent and income is paid monthly which can be important for older investors relying on this income to boost their pension.