Money Q&A: How do I enter the ISA jungle?

We are both looking to top up our pensions. We've recently opened a cash mini ISA. We are now wondering about a saving a regular amount of about pounds 100 a month in an equity ISA. We have no knowledge of the stock market and would not want to risk losing everything, though we understand that over 10 years the risk is very low. But there are so many equity ISAs available we'd be grateful for any advice or guidelines with particular reference to reliability and management charges.

JM, LONDON

There is a wide consensus that the ISA rules are absurdly and confusingly complicated. For that you have to thank Gordon Brown. Write to him if you think they should be changed.

First, let's clarify the ISA rules. You talk of "we" and I assume that you are a (married?) couple. In fact couples, married or otherwise, cannot open joint ISA accounts. So you can each have an ISA, or you can have one ISA in one name. What you currently have also affects your ISA options for the rest of this tax year, which ends on April 5.

Each tax year you have a choice. You can open up to three mini ISAs each tax year - one for cash, one for life insurance and one for stock market investments. This tax year, the investment limits are pounds 3,000 for cash, pounds 1,000 for life insurance and pounds 3,000 for the stock market. In subsequent tax years, the investment limit for a cash mini ISA falls to pounds 1,000.

Alternatively, you can open one maxi ISA each tax year with an investment limit of pounds 7,000 in this tax year, pounds 5,000 in subsequent tax years. This money can all be invested in the stock market, or it can be divided in the same way (cash, life insurance, stock market) and with the same limits as mini ISAs, but within the one plan.

So, for example, a husband and wife could each take out a maxi ISA this year and invest up to pounds 14,000 between them, all in the stock market.

That option is no longer open to you this tax year because you have already opened one cash mini ISA (or is it one each?). People who have opened a cash mini ISA can open two further mini ISAs. One is a life insurance mini ISA, an option that few providers offer and which has had few takers. The other is a stock market mini ISA with an investment limit of pounds 3,000. That pounds 3,000 limit is more than enough for someone who wants to invest pounds 100 a month.

However - and here's the crucial point - it is vitally important that when you find a fund to invest in, you make it clear that you want a stock market mini ISA. If you accidentally subscribe to a maxi ISA when you have a mini ISA for this tax year, you will be breaking the rules. The maxi ISA will, therefore, become invalid and lose its tax-free status.

ISA complications apart, where should you invest your money? Strictly speaking, only authorised advisers who have found out about all your circumstances are allowed to give you individual advice, and may be you should consider getting such advice. But the typical advice for the typical long-term (at least five to 10 years) investor would be to start a portfolio of investments by looking for a fund (eg, unit trust) that invests in the largest UK companies. Large established companies are generally considered to be lower risk. You may not get the best returns, but you may be less likely to lose money.

In looking for funds that invest in large UK companies you will have a choice. You can go for an actively-managed fund or an index-tracking fund. With an actively managed fund, a fund manager picks the individual companies to invest in according to their prospects of outperforming other companies' shares.

But actively-managed funds have higher charges. There is a long-running debate over whether it is worth paying these charges and whether City experts can pick winners and deliver better returns.

The alternative is the index-tracking fund. Various models are used to track an index, such as the FT-SE 100. The basic principle is the same for all. A computer program decides which shares to invest in based on their weighting within the index. No consideration is given to whether an individual company's shares look a good prospect. The idea is to mirror the movements in an index. On past performance, the long-term trend of most stock market indices is up. They have attracted huge amounts of money and they are often recommended as the ideal starting point for novice investors.

For more information, and for pointers to find the most suitable funds for you, ring the unit trust information service on 0181-207 1361. It is run by the industry's trade body and provides a range of pamphlets on investment. You might also find the statistics pages of Money Management magazine useful.

Write to the personal finance editor, Independent on Sunday, 1 Canada Square, London E14 5DL, and include a phone number; or fax 0171- 293 2096; or email c.francis@independent.co.uk. Do not enclose SAEs or any documents you wish to be returned. We cannot give personal replies, nor can we guarantee to answer letters. We accept no legal responsibilities for advice given.