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Should you invest a lump sum or drip cash in, buy direct or buy advice? And what about PEPs? By Tony Bonsignore
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The investment trust industry has had a rough ride in recent years. While unit trusts have seen their popularity rocket, investment trusts have been dismissed as too complex. At the same time, their performance has also been sometimes unjustly slated.
All of which is rather unfair. Investment trusts remain an excellent investment choice for many people, with the average, long-term investment trust performance better than an average unit trust's. And investment trust groups have worked hard to entice private investors into buying their shares.
If you have a lump sum to invest, then it is easiest to buy directly. Many trusts, however, have a wide variety of different shares on offer, from ordinary shares to those which will not pay out a dividend but may reward you with more capital growth. Your stockbroker or financial adviser should be able to help you through the maze.
You can consider using your personal equity plan (PEP) allowance to buy into investment trusts. This allows you to invest up to pounds 6,000 before next April, and any gains you make will be free of income and capital gains tax. Investors are allowed one PEP plan each year and a large proportion of investment trusts qualify. To check, contact an individual manager directly or call the Association of Investment Trust Companies (0171-431 5222). The AITC produces a monthly guide, with details of the investment trusts available, as well as a number of factsheets.
Investment trust PEPs are available from as little as pounds 500. You can add more money later, subject to the pounds 6,000 limit and up to a quarter of the total can be put into non-qualifying trusts - those companies which do not invest European stocks. Again, your plan manager will be able to tell you what is on offer.
PEP investors have also been boosted by the news that any investments made before April 1999 will be allowed to continue when PEPs are then replaced by individual savings accounts (ISAs). Investment trust ISAs, meanwhile, should start appearing next spring.
Alternatively, you can invest in a savings and investment scheme from as little as pounds 25 a month. Some groups offer regular-savings plans, some have designed them for PEPs, while a few offer personal pensions.
With these schemes, you decide how much to invest each month and pay this to your plan manager via a standing order or direct debit. Most allow you to increase or decrease your contributions each month without penalty. The majority will also let you invest the occasional lump sum or even stop paying your contributions for a while.
Regular savings plans have a number of benefits. Feeding your money in bit by bit means your cash would be not be hit as hard as it would be if the market crashed immediately after you invested a large lump sum. It also means you buy shares "cheaply" as prices fall, which will be worth a lot more if they rise later on.
A number of other options are available. Some groups offer a share exchange facility, where the company will switch your other investments into investment trust shares. Others allow you to swap at minimal cost between different trusts in the group. Again, the AITC can provide full details.
Investors must also decide how they want to buy their investments. Some choose to buy direct from the investment trust itself. This can the cheapest way, but cost is only part of the story. A saving of, say, 1 per cent is irrelevant if your particular trust is a poor performer. It is worth checking out the manager before you go down this route.
The other option is to seek advice. A good stock broker or independent financial adviser will be able to recommend a suitable trust, as well as helping you with your overall financial planning. Of course, you will have to pay for the advice but it is often worth the investment in later years. IFA Promotion (0117 971 1177) can provide you with a list of independent advisers in your area.
Tony Bonsignore writes for `Financial Adviser'.
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