The 'rainbow of risk' for ISA investors

The 'rainbow of risk' for ISA investors

The clock is ticking if you want to use your £15,000 ISA allowance before the end of the tax year on 6th April.

We have put together a 10-step 'rainbow of risk' to rank ISA investments in order of their risk of loss, to help you make the best decision when choosing how to use your money.

1. Cash

Keeping your spare funds inside a Cash ISA is the safest thing to do with your money. Not only is your capital not at risk, it's also backed by the Financial Services Compensation Scheme (FSCS). This covers 100% of the first £85,000 of cash deposits per person, per authorised institution.

The big problem with Cash ISAs is their poor long-term returns, as almost all Cash ISAs pay interest rates below 2% a year. Your money will be safe, but it will grow very slowly.

Compare Cash ISA rates

2. Government and corporate bonds

Bonds are IOUs issued by governments, companies and other organisations. These debts are known as fixed-income investments, because they pay a fixed rate of interest throughout their lives. When your bond matures, you get back the sum you originally invested.

Bond coupons (their regular payments) range from below 1% for AAA-rated bonds right up to double-digit payouts from high-risk bonds such as Greek government debt. The risk spectrum for bonds goes from ultra-safe all the way up to high-yielding or 'junk' corporate bonds. A safer way to invest in bonds inside your ISA is via a bond fund run by an acclaimed manager.

3. Peer-to-peer lending

Peer-to-peer lending uses an internet platform to connect savers looking for higher returns with individuals and companies looking for non-bank loans. This is a booming business, with lenders arranging nearly £1.3 billion of personal and business loans last year, almost triple the £480 million lent in 2013.

Peer-to-peer loans can't be placed inside your ISA just yet, but the Government is committed to including them this year. And when they do, peer-to-peer loans are a relatively safe option, depending on which firm you choose to lend through. Returns from the big peer-to-peer lenders like Zopa, RateSetter and LendingWorks all exceed 5% at the moment, and they all have provision funds in place to cover any bad debt.

Compare peer-to-peer lending rates in our saving centre

4. Index trackers

An index tracker is one of the simplest collective investments around. Quite simply, it is a fund (or Exchange-Traded Fund) that tracks a particular index, mimicking the performance of that market. The cheapest tracker funds (those following the FTSE 100 or FTSE All-Share) charge less than 0.1% a year in management fees.

The great thing about owning a tracker fund is that while you don't beat the wider market, you also don't grossly underperform it. In fact, research has repeatedly shown that index trackers actually outperform managed funds.

5. Managed funds

With a managed fund, you hand over your cash to a professional fund manager, who places investors' money into shares or bonds, or property. The big problem with managed funds is their various layers of fees, which easily can guzzle, say, 1% to 2% of your yearly returns.

As nine out of 10 fund managers fail to beat their benchmarks over 20 years, sorting fund managers into tomorrow's stars and dogs is a thorny task. Be wary of all brokers and financial firms claiming success with identifying the star fund managers of the future, as picking active managers is almost as hard as picking shares themselves.

6. Big firm shares

With collective investment such as index trackers and managed funds, your money is diversified: spread across a wide range of shares. In contrast, buying individual shares concentrates your portfolio and makes it riskier.

The largest, most liquid and least volatile shares listed on the London Stock Exchange are those issued by members of the FTSE 100 index of elite British businesses.

These shares are very widely held and easy to trade in volume. Also, most pay decent dividends, which are regular cash payouts to shareholders.

7. FTSE 250 shares

Just as the FTSE 100 includes the UK's 100 biggest London-listed companies, FTSE 250 members comprise the next 250 largest listed firms.

The FTSE 250 is much more UK-focused than the multi-national FTSE 100, making it a better gauge of UK growth. However, it's a smaller, less liquid and more volatile hunting ground for shares.

Despite these extra risks, mid-cap shares have - on average - thrashed blue chips over one, three, five and 10 years. Then again, FTSE 250 firms can be really risky, with a fair few blowing up or going bust during the global financial crisis.

8. Overseas shares

Holding a UK-centric portfolio risks missing out on foreign growth, especially in fast-growing developing nations. But overseas investments are fraught with perils, like currency risk wiping out your returns.

Overseas shares are harder to trade and to risk-rate too, thanks to widely different standards of accounting, property rights and the repeated asset seizures.

9. AIM shares

The Alternative Investment Market (AIM) is the London Stock Exchange's junior market for small and growing companies. Since the launch of AIM in 1995, more than 3,000 companies have listed on this growth market. AIM is less tightly regulated than the LSE, so blow-ups and accounting scandals happen fairly frequently.

Although there are valuable Inheritance Tax breaks to be had from owning AIM-quoted shares, 100% capital losses are fairly common. Investing in AIM shares via a respected and well-managed fund is probably the safest option.

10. Crowdfunded shares

At present, investors cannot hold crowd-funded shares and bonds inside ISAs, but this is likely to be an option by next year.

Driven by platforms such as Seedrs, Crowdcube and Syndicate Room, crowdfunding of early-stage businesses is experiencing explosive growth, with £84 million raised last year in equity crowd-funding. But crowdfunded shares are incredibly risky, because you are buying shares in start-ups, early-stage firms and the smallest of businesses, and the vast majority go bust within the first few years.

If you want to invest in high-risk ventures, then forget your ISA. Instead, explore Venture Capital Trusts (VCTs), as these offer generous tax relief to compensate for the added risks.

Read more on AOL Money

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The 'rainbow of risk' for ISA investors

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The service works through a smartphone app. When you're out and about you can use the app to find a driver in your area, hail them at the push of a button, and track their progress in reaching you.

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This is a free shopping app, which lets you scan barcodes when you're shopping, and the app will do a price comparison for the same products in local shops and on websites. You can even buy it online through the app.

It will also let you scan products you have at home and find the cheapest local (or online) stockist.

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It isn't perfect, because it relies on the information provided by the agents, so if the agent is tweaking the headline rate and then reverts to a higher price when you enquire, you'll waste a bit of time with the agents. It's therefore worth checking reviews on the cheapest agents that come up before you go any further. The prices drawn direct from the airlines, meanwhile, tend to be accurate.

This is a clever site which is designed to help you get a cheap deal on It has a few features, which you can use together to make sure you always get a good deal from the site.

The first is the price history charts, which show how the price has changed over time, and how the current price compares. If the price is comparatively low you can just buy at that price. Alternatively, if it has risen recently, you can set a price alert, where you input a price you would be happy to pay, and you will receive an alert when the price drops to this level.

If you use a lot of data on your smartphone, onavo extend will help you dramatically cut the data you get through.

It is a compression app, which works in the background on services like sending and receiving emails, checking maps and browsing the web, and ensures it all uses less data (although it doesn't work on things like Skype or streaming video). It works by ensuring that before any data is sent to your device, it goes through the company's servers and is compressed.

It can cut the amount of data you use by up to 50%, which can help you keep within data limits and save you a fortune. It will also monitor how much data you actually use which will help you pick the most cost-effective plan.

When you call 0800 numbers from your mobile it's not free, and it's usually not counted as part of your monthly inclusive minutes, so you'll be charged extra for the call.

If you install the free 0800 Wizard app, you type in the 0800 number, and it will automatically re-route your call to an 01, 02 or 03 number instead. These cost the same as a standard local call, so will be part of your monthly package. If you don't have any minutes left it will be charged as a standard geographic number.

This website is designed to let you shop around without leaving your home. You can use it in whatever way suits you best. For the dedicated bargain-hunter, you can input everything you want to buy, find the supermarket where each item is cheapest, and spend the absolute minimum.

For those who need a bit more convenience, you can fill your trolley as normal through the site (and use the swap and save button to see if you can save by buying a different size or brand). A basket icon on the right hand side of the screen will show you the cost of the same shop at alternative supermarkets, so you can switch the whole lot over at the click of a button. And there's even a vouchers button you can use before you checkout to see if you can save more. The site claims that you'll save an average of £17 every time you shop using the site.

There are lots of voucher apps and websites out there, but one which is worth a look is vouchercloud. Whether you're shopping, eating out, going to the cinema or going for a drink with friends, you can use the location function of this app to find the best deals on offer near to where you are. 
This site has been around for a while, but remains a vital tool. You can search for the cheapest petrol in your area - or the area you are visiting - so you can pay less for your fuel without going out of your way. It's free to sign up and you get 20 free searches a week. There's also a PetrolPrices Pro app, so you can check prices when you're on the road.

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