What should I invest in?

Published by Money Observer on 12 November 2013.
Last updated on 12 November 2013

Questions and directions

As each has its own characteristics, picking the one – or even two or three – that's right for you could bring additional benefits to your investment strategy.


If you invest directly in shares you are holding a small part of a company and will benefit financially if it is successful, either through an increase in the share price or through dividends, where the company distributes the profits it doesn't reinvest in the business.

Shares are bought through a stockbroker or an online sharedealing service and you'll pay a charge of around £10 plus stamp duty reserve tax of 0.5% of your investment. However, shares listed on the Alternative Investment Market (Aim) are free of stamp duty from 6 April 2014.


  • You can choose which companies you want to invest in
  • As a shareholder you usually have the opportunity to vote on some company decisions


  • Lack of diversity - unless you hold a portfolio of shares your investment is concentrated in one company
  • Dealing charges can make this an expensive way to invest if you are a small investor


Funds such as unit trusts and open-ended investment companies (Oeics) are collective investments which allow investors to pool their money together to create a large fund that invests across a range of different shares and/or other assets such as bonds. This is run by a professional manager in line with the fund's objectives.

Not all funds are actively managed: some are run on a passive basis with a computer programme replicating the holdings of an index such as the FTSE 100 or the FTSE All-Share. This means the performance of the fund will never beat the return of the index, although this isn't necessarily something that an actively managed fund will do either.

To invest, you buy units with minimum investments as low as £500 or £25 a month, and there are no restrictions on when you sell. Charges vary depending on the type of fund and how you buy it but are typically an initial charge of up to 5% and an annual management charge of up to 1.5%. Most online discount brokers will refund all of the initial charge and many refund a portion of the AMC.


  • Instant diversification without a large upfront investment by you
  • Investment decisions are taken by an experienced professional manager
  • Thousands of different funds to choose from investing in equities, bonds and property as well as other types of assets


  • Management charges can be high


A pension fund is operated in exactly the same way as a fund, with a manager investing according to the fund's objectives, but because it is a wrapper specifically for pension investments, there are some important tax advantages.

Subject to your earnings and the annual and lifetime pension limits, anything paid into a pension fund receives tax relief at the basic rate, effectively topping up an £80 contribution to £100. Higher rate taxpayers receive tax relief at their highest marginal rate. Additionally, although you cannot reclaim the 10% tax credit on dividends, all income and gains are also tax-free.

However when you come to take benefits, either as an annuity or when drawing income from a personal pension, these are subject to income tax.


  • Instant diversification
  • Tax breaks


  • Money cannot be accessed until retirement

Find the best annuity rate for your circumstances


Another form of collective investment, exchanged traded funds (ETFs) seek to replicate the performance of an index, commodity or basket or assets. This tracking is achieved either by holding the constituents of the index or by using derivatives to create it synthetically.

ETFs are a branch of 'exchange traded products', which also encompass exchange traded commodities (ETCs) and exchange traded notes (ETNs)

Other ETFs also seek to follow thematic investment indices, such as those that comply with Shariah law or socially responsible principles, or which appeal to income-seekers, for example.

ETFs are traded on the stock market, so there are upfront dealing charges to consider although they are exempt from stamp duty reserve tax. The annual management charge is very low with many ETFs having an annual total expense ratio of less than 0.5%.


  • Low cost
  • Access to more exotic markets as well as the well-known indices
  • Instant diversification


  • Counterparty risk on synthetic ETFs


A venture capital trust (VCT) is a form of investment trust that invests in fledgling companies that are looking to develop their business. The nature of these companies means that this is a higher risk investment: while some will turn into the large corporations of tomorrow, others will inevitably fail.

As a result there are a number of tax incentives to encourage investment. These include tax-free income, dividends and gains and an income tax rebate of 30% of your initial investment into new VCT shares, providing you have paid sufficient income tax that year and you hold the shares for at least five years.

The maximum investment to obtain tax relief is £200,000 a year but, due to the high level of risk, it is recommended that VCTs only form a small part of your total investment portfolio.


  • Generous tax breaks
  • Opportunity to invest in very small companies


  • High risk and therefore more suited to sophisticated investors

This feature was writtten for our siser publication Money Observer

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