Isa holders are able to put their money in Aim stocks. If you are prepared to take a risk they offer profit opportunities – but it’s not for the faint-hearted
Fledgling companies are often considered a high risk home for investors, but success stories such as online fashion retailer Asos could prove appealing to Isa holders who can now put their money in stocks floated on the Alternative Investment Market (Aim).
Changes to Isa rules mean that from 5 August investors can now hold some or all of their annual allowance in Aim shares. In the 2013-14 tax year the Isa allowance is worth £11,520 and any capital gains are tax free, while dividends attract lower tax than on shares held outside an Isa.
Asos is Aim’s biggest stock, and currently trading at more than £45 a share – a gigantic return for those who invested when it floated in 2001 at 20p a share, despite a bumpy ride in the interim. An array of other well known Aim-listed companies such as Majestic Wine have also richly rewarded investors.
Buying individual shares on this market is not for the faint-hearted, as they do not have large sums of cash to shore up their balance sheets and can prove volatile. However, if you are prepared to take a risk they offer opportunities for profit.
Patrick Connolly from independent financial advisor Chase de Vere says: “These companies are typically more dynamic and have greater growth potential than larger firms, which are often at the consolidation stage of their development. Over most reasonable time periods it is likely that smaller companies will outperform their larger counterparts.”
If you want to buy individual shares you will need to buy your Isa from a firm that offers access to share dealing. A less risky way to invest in Aim stocks than buying them directly is to invest in a smaller companies fund. A fund manager will select the shares and spread your money across many companies. A fund can also be held in a stocks and shares Isa.
Aim stocks are likely to have minority appeal to investors, but it is worth exploring what you can hold in your Isa and making sure you are making the most of your money. Whatever you choose, here are five tips to help you maximise your returns:
1. Invest in a mixture of assets
Even the experts have a tough time predicting which assets or sectors will perform best, so avoid sticking to one particular type of investment for your portfolio. “Spread your money across different assets such as cash, equities and fixed interest, but make sure this is in the right proportions to meet your objectives and attitude to risk,” Connolly says.
If you’re putting a smaller sum of, say, £2,000 in an Isa it could make sense to pick one fund that offers diversification across asset classes, says Adrian Lowcock of Hargreaves Lansdown. He favours the Schroder Managed Balanced fund for this approach, while Connolly recommends Cazenove Multi Manager Diversity.
2. Ignore fashionable investments
A common investment mistake is to buy based on short-term performance figures, or when a fund or share has peaked in value, and sell when things turn sour, losing money in the process. It is best to take a measured approach to investing, Lowcock says. “Ask yourself why are you investing and what are you using that money for – and, ideally, pick a long-term timeframe of five years or more to ride out market volatility,” he says.
3. Make regular contributions
Investing regular premiums rather than one-off lump sums is a sensible way to tackle uncertain times or periods of stock market volatility. This means you are able to buy a greater number of shares when the share price falls, which will result in higher overall investment returns when a recovery takes place. Monthly savings also help remove the risk of emotional bias, as you won’t be buying based purely on sentiment at the time. “Each month, whatever is going on in the world, your monthly savings gets invested,” Lowcock says.
4. Be prepared to tweak your portfolio
Check your investments once a year to make sure they remain in the right shape to meet your objectives and attitude to risk, and don’t fall into the trap of becoming too attached to certain investments, says Helal Miah, investment research analyst at The Share Centre. “A common mistake is to hold steadfastly on to shares which may have served well in the past, but no longer represent a sound investment,” he says.
5. Check the charges
Watch out for initial charges on managed funds, which are typically around 5% but easy to avoid. Discount brokers and advisers including Bestinvest, Chelsea Financial Services, and Hargreaves Lansdown, refund you most – if not all – of this charge when you invest. “Be wary of paying over the odds for actively managed investment funds that don’t outperform passive trackers, funds with additional performance fees, or fund of funds investments which usually have higher charges, which isn’t translated into better performance,” Connolly says.
• Visit the Guardian’s fund supermarket for advice on investing
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