4 Factors to consider when choosing a shares ISA
A shares ISA is a good choice for putting away cash in a tax-sheltered product over the long term. However, a shares ISA also carries a degree of risk, since shares are tied to the performance of the stock market. By the same token, a shares ISA also promises a greater potential for earnings.
The wide choice of shares ISA options available can make it difficult to choose the right account for your needs. We have four factors to consider when shopping for a shares ISA, to ensure you find the best fit for you.
Types of shares ISAs
There are many different types of shares ISAs, and they vary in terms of the level of risk and the type of return expected. Types of shares ISAs include:
- Managed investment ISAs, where money is invested on your behalf by a fund manager
- Tracker investment ISAs, where returns are typically tied to a specific financial index
- Self-directed ISAs, where the you're free to determine your own investment portfolio
The best choice for you depends on a variety of factors; for example, how savvy you are with investments, the risk level you are willing to accept, and the potential return you hope to receive.
Rate of return
Your rate of return is an important consideration when it comes to investment ISAs, because it will determine how much profit you can expect to generate from your money. However, a larger potential return usually involves a higher risk factor.
To determine the potential rate of return, many would-be investors look to the past or present performance of the funds that interest them. However, previous performance is not the best indicator of how a fund will perform in the long term. This is why many investors seek input from a financial advisor before choosing a shares ISA.
Some people are comfortable with a greater degree of risk than others in exchange for potentially getting a higher rate of return. This approach is particularly effective if you plan to invest over a longer period of time, since you will have time to recoup possible losses - which are highly likely to occur over the term of the fund due to fluctuations in the market - and eventually earn a decent return.
However, others are not willing to take on as much risk. These investors are happy with the lower rate of return that comes with their limited risk factor. This is especially important if you don't plan to invest your money for very long. Only you can decide how much risk you are willing to undertake when it comes to shares ISAs.
Investment ISA fees
Because shares ISAs often require participation from a variety of investment professionals, there are often fees involved with the purchasing or trading of shares. It is important to shop around for the best deal on fees, while still getting the knowledge and experience of good fund managers and advisers.
Some investors find that tracker investment ISAs are less expensive than managed investment ISAs because they don't require the same level of participation by a financial expert. However, a well-managed fund might pay off bigger dividends to offset the higher fees.
Choosing a shares ISA isn't easy, which is why it's sensible to consult a financial advisor, who will help you find a balance between risk and reward.