Equity ISA

By: EconomyWatch Content   Date: 14 December 2009

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Equity ISA is a tax saving investment option that does not attract income tax or tax on capital gains. Also called stocks and shares ISAs, equity ISAs have a limit of £7,200 each tax year. Lower rate taxpayers need to pay tax on dividends, while higher-rate taxpayers needn’t do that.

Stocks and Shares ISA – Options

 

A stocks and shares ISA has a cash limit of £3,200 each tax year. One can invest the rest in stocks and shares or the entire amount in stocks and shares. Investing in shares and stocks is a great option for long term investors, since shares tend to outperform other asset classes in the long term. You can opt for funds instead of individual shares so that the risks are balanced. Even among funds, there are some that have higher risk than others. Some investors may be interested in taking high risks and want higher returns, while others may want to take low risks and reasonable returns. Based on the risk taking capacity, one should consider various funds.

Diversified Funds for an Equity ISA

If you want to limit your risks, you should opt for a fund that invests across sectors, asset classes and geographies. You can choose a fund of funds or a multi-manager fund in which a fund manager will choose the best performing bonds in order to diversify the investment and maximize the returns. If you want to use this option, you need to pay for the cost of holding and the fund manager. You can also opt for a managed fund that would invest in equities, bonds and cash to enjoy the diversification benefits. Another option is a multi-asset fund that invests in equities, bonds and cash, as well in properties and alternative asset classes, such as private equities and hedge funds. If you are very confident about your decision making you can build your own funds portfolio from the equity ISA.

The returns from an equity ISA can be substantially higher than those from a cash ISA in the medium term to long term. Hence, you should choose a cash ISA if you have short-term investment goals and opt for a stocks and shares ISA if you can wait for five years and are willing to take some risks.

           

 


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