5 Tips for Investing in Investment Trusts through an ISA

 

An Individual Savings Account, (ISA), is the armour that guards your money from the taxman; enabling it to grow without the burden of income or capital gains tax.

There are two types of ISA; a cash-ISA is a tax-free savings account and a stock market ISA holds investment funds, trusts, or shares. Both offer tax protection which can largely impact on the value of the ISA over the long-term, particularly if you are a higher rate tax payer investing in the stock market.

 

1  Diversification is the key to spreading investment risk

 

For smaller-scale investors, holding individual shares in one or two companies is a fairly high-risk approach to investing; if one of those companies found itself in hot water, the whole investment portfolio would be affected. There are various ways of spreading this risk and therefore reducing it, however.

Diversifying investments across geographical regions, asset classes, and funds or trusts, will spread risk across a broadened portfolio. Investment trusts have the added benefit of oversight from an independent board, which acts to both challenge or support the fund manager in their investment decisions, as-and-when is necessary.

 

2   Watch out for charges

 

Charges can have a major impact on the total returns of an investment; therefore it is important to be clear on what exactly you are paying for. Passive fund management, where a computer buys all of the assets in a particular market index, is often cheaper than paying for an actively managed fund, which is run by a fund manager who makes calculated investment decisions on your behalf.

If you choose to pay for an actively managed fund, you must make sure that the fund manager is adding value to your investments and is consistently outperforming the market index; at Henderson Global Investors, many of our investment trusts are run by the company’s most experienced fund managers.

 

3   Regular saving

 

A regular saving scheme, for example on a monthly basis, could be an effective way of managing investments without having to part with a large chunk of money in one go. There is also less risk involved with a monthly drip-feed of money into your investments as you are less affected by the ups and downs of the market, buying more units when the market is cheaper and fewer when it is more expensive. This means that you can actually end up with more shares for the same amount of money invested.

 

4   Shielding current investments from future tax

 

In the past, investors could ‘bed and breakfast’ an investment by selling it on the last day of the financial year and buying it back the following day, with the intention of rebasing its value and avoid accumulating capital gains.

This is no longer allowed; however, it is possible to ‘bed and ISA’ existing holdings by selling shares worth £11,000, (which is the capital gains exemption amount), and then re-buying them within an ISA, in order for any forthcoming income and growth to be tax-exempt. Whilst this process does generate a capital gain, it is not necessary to pay any tax as the profit from the sale is less than the capital gains tax exemption.

 

5   Review & balance

 

 

Reviewing your investment portfolio on a regular basis is fundamentally important. To ensure you are taking an appropriate amount of risk, it may be wise to sell some assets that have performed well and now dominate the portfolio, and reinvest the cash into investments that haven’t performed as well and have shrunk in proportion. The risk if you do not take these steps is ending up with a large proportion of something like emerging market funds, that could lose their value as dramatically as they gained it. On the other hand however, if this process is done too quickly, the charges from making these changes could outweigh the benefits of the rebalancing process.

 

 

In case of any doubt and before taking an investment decision, please consult with your investment advisor.

The value of an investment and the income from it can fall as well as rise and you may not get back the amount originally invested.

 

 

Nothing in this document is intended to or should be construed as advice and you should satisfy yourself as to its suitability and the risks involved, you may wish to consult a financial adviser.

This document is not a recommendation to sell or purchase any investment. It does not form part of any contract for the sale or purchase of any investment.

Issued in the UK by Henderson Investment Funds Limited (reg. no. 2678531), incorporated and registered in England and Wales with registered office at 201 Bishopsgate, London EC2M 3AE, is authorised and regulated by the Financial Conduct Authority to provide investment products and services.

 

 

 





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