Stocks Tracker
Stocks Tracker
Understanding the Main Risks of a Stocks and Shares ISA
A Stocks and Shares ISA can offer you great returns on your investment, but it also carries greater risk and complexity than a Cash ISA.
While a Cash ISA offers the security of regular interest, the value of your investment on a Stocks and Shares ISA is always subject to rises and falls. Nevertheless, now more than ever, due to the ISA Allowance increase coming into effect at the start of the new tax year, you will be missing out on a substantial tax break if you ignore Stocks and Shares, because your allowance is higher for these than for Cash ISA’s.
While my previous article on the subject looked at how to get going with investing in ISA Stocks and Shares, this guide will describe the main risks involved.
The Main Risks of Investing In Stocks and Shares ISA’s
Stock Market Fluctuations
With Stocks and Shares ISA’s, the successful return on your financial investment is tied to the ever fluctuating stock market indexes – while you will run the risk of losing out if the stock market takes a downturn, you also stand the chance of major boon when things take a turn for the best. A good fund manager will be worth their weight in gold in making sure you always come out on top.
Risk Levels
There are different levels of risk when it comes to this type of investment – the level you’re comfortable with depends on your appetite for risk as well as having an excellent fund manager. A UK tracker that follows the FTSE 100 up and down on a daily basis for example is a less risky option than a fund investing in Indian technology companies. All in all, it’s a bit of a gamble – the more you risk, the more you stand to either lose or win. The yard stick for deciding exactly how much you can afford to roll the dice, is weighing whether you’d be kept awake every night worrying about losing all your money on the investment – if this would be the case, then you probably shouldn’t go through with it.
Investment Costs – The TER
There are two main charges when it comes to buying funds – the initial charge (it takes up to 5.5% investment to buy into the fund) and the Annual Management Charge (AMC) which costs up to 1.5% of the investment to cover administration fees and your manager’s time.
Bear in mind that the AMC isn’t always the best way to compare the cost of different funds when shopping around. You will be better placed by looking into a fund’s Total Expense Ratio (TER) – this is the actual and comprehensive administrative cost of running your fund, includes charges for auditing, documents for trustees, custody of shares and legal expenses.
The TER in fact incorporates the AMC. It can rise to 3% or more on many funds, meaning the lower the TER, the cheaper and more efficient the fund will perform when it comes to cost management and outlay.
Also know that a multi-manager fund’s TER will naturally tend to be higher because it entails the multimanager buying lots of different funds on your behalf, which will result in higher fees.
Your investment costs factor into your overall return, so it’s crucial to weigh these instead of purely focussing on the annual performance of a fund.
Company or Bond Funds
Choosing to invest in a company or in their debt (i.e. a bond fund) means you will be casting your lot with their fortune – while you will tend to feel safe with major company brands that you know and trust, factors such as corporate scandals, economic booms and busts, regulations, profit or loss margins and even political turmoil can all drastically affect the return on your investment.
To minimise your risk, it’s a good idea to research what the company you’re considering invests in. The next important factor to investigate is who runs the fund – a fund manager’s successful track record can make or break your investment’s potential for success. The fund’s factsheet will shed light on both of these details.
Conclusion
If you thoroughly do your research when comparing and choosing funds as well as find yourself an expert fund manager with a successful track record, investing in a Stocks and Shares ISA can yield you impressive returns.
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