Will health be good for your wealth?

Set up your individual savings account now and you can maximise your returns

With six months left to invest this year's tax-free allowance of £7,000 in an individual savings account (ISA), you may be thinking that you've got plenty of time to get round to it.

With six months left to invest this year's tax-free allowance of £7,000 in an individual savings account (ISA), you may be thinking that you've got plenty of time to get round to it.

But it is worth remembering that, statistically, those investors who put regular amounts into an ISA over the year get better returns. And those who buy their ISAs on the eve of the 5 April deadline get less for their money as the price is inflated by the surge of interest from other investors.

So with this in mind, which funds are attracting investors this year? Technology remains popular, despite the volatility of the sector (see opposite page). But healthcare is predicted to be the big growth story this year and in the future.

Much of this interest is down to the success of the project to map the human genome (the blueprint for the established 200,000 different genes that create a human being), which was finished several years ahead of schedule. Drugs can now be tailored to individuals to make them more effective. Biotechnology and healthcare are undeniably highly speculative, but just think what would happen to the share price of a company that discovered a cure for cancer.

"Unlike dot coms, these companies are creating tangible, sellable products," says Donna Bradshaw, director at independent financial adviser (IFA) Fiona Price & Partners. "There is quite a lot of confidence in the sector, although it is not for the faint-hearted."

While general European and North American ISAs often have some exposure to biotech and medical companies, specialist healthcare funds are being launched in response to increased demand. Unfortunately, as some of these funds are so new, they have no track record.

"You can't say with a new fund how good the performance is going to be," says Ms Bradshaw. "It might be worth taking a punt. But you should do a lot of homework, look at the underlying investments and bear in mind how long the manager has studied this type of investment."

Framlington Healthcare is one of the best-established funds in the sector. It was launched in 1987 and its manager, Antony Milford, has been involved with the fund since then.

"In this particular sector, that expertise is very important," says Framlington's marketing manager, Lesley Hankin. "[The sector] is hugely specialised and he knows it inside out and backwards."

The fund is available as an ISA, and has £400m in assets under management. But even though it is long-established, it is highly volatile. In the past 12 months (to year ending 1 September), however, it rose by 228.2 per cent, topping the specialist fund sector, according to Money Management magazine.

Fidelity Investments has just launched four new funds concentrating on different sectors, one of which invests in healthcare (the others are financial, industrial and consumer). Brigitte Ascher, fund analyst at Fidelity, believes that the healthcare industry has great growth potential for investors. "It is expected to increase its revenues due to the fact that the population is ageing," she says. "Older people need more drugs and more looking after from a healthcare point of view, so spending will continue to rise."

Ms Ascher also points out that the discovery of blockbuster, or money-making, drugs is expected to increase over the next few years, with quite a few currently in the pipeline. According to figures from Merrill Lynch, a total of seven block-buster drugs will be launched this year, doubling to 14 next year and 17 the year after.

The fragmentation of the healthcare sector, coupled with the rising costs of research and development, means that there are also likely to be a number of mergers in the industry - which can be good news for investors.

When Glaxo Smith-Kline completes its merger, becoming the biggest pharmaceutical company in the world, it will still capture just 7 per cent of the overall market, with many much smaller companies having a tiny stake.

Depending on their exposure to biotechnology, some funds are riskier than others. Investors should look at their underlying investments carefully. Framlington Healthcare, for example, opts for big pharmaceutical firms and invests only partly in biotechnology stocks. The Schroder Medical Discovery fund opts for mainly healthcare with a few biotech companies thrown in, as does Flemings' Global Life Sciences. Franklin Biotechnology, available from Edinburgh-based fund manager Templeton, invests exclusively in biotech.

Whichever fund you choose, bear in mind that it should form only part of your overall portfolio because of the high-risk factor. Only if you have a broad spread of investments in other sectors and countries, should you look at healthcare, and even then, you should be prepared to tie your money up for 10 years or so.

"Keep your head on your shoulders and don't get carried away with short-term gains," says Ms Bradshaw. "Then you won't make the mistake people did with technology, in going for the fast buck. It is wise to keep the bulk of your money in less speculative funds."

* Contacts: Fidelity, 0800 414161; Flemings, 0500 500324; Framlington Group, 0345 775511; Schroders, 0800 718777; Templeton, 0131 228 3932.