Sit back and let the cash grow

Should you invest for capital growth or an income?

Helen Monks explains the case for growth

THERE are hundreds of Isa fund choices, but don't be bewildered - you just need to work out whether you want to invest for income or growth and how much risk you are willing to take to achieve it.

If you want growth, your main aim will be to turn your investment into a sizeable lump sum. This means not taking the income each year but reinvesting the interest and dividends instead.

If you choose a fund designed for growth, the fund manager should invest in companies whose shares are undervalued and are likely to go up in value over the next two to five years.

If you want to cash in on this growth, it means investing for the longer term, more than five years, and accepting a level of risk to your capital.

Growthseekers tend to be younger investors with time to watch their money grow.

Ben Yearsley, investment manager at independent financial adviser Hargreaves Lansdown (www.

hargreaveslandsdown.co.uk), says: "People are thinking too much in the short term. If you are not prepared to see your money fluctuate, investing for growth is not for you. Investors should not check the value of their investment every day, week, or month. You only make money by investing long-term."

The amount of risk you take depends on where your money is invested.

Yearsley adds: "If this is your first year of using Isas, don't go for anything clever, fancy or volatile, such as a healthcare fund or a Far East fund.

Stick to sensible, solid funds that will make up the core holdings of your portfolio. You can add more interesting sectors or geographically specific funds later. The most popular choice for new investors is UK equities."

There is a fierce industry debate over whether investing in funds which simply track the performance of the stock market index - known as passive or tracker funds - or "active" funds, where fund managers attempt to outperform an index, are best for growth.

Recent research by Virgin Money (www.virginmoney.com) shows that nearly two-thirds of actively managed funds failed last year to beat the FTSE All-Share index, meaning most investors would have been better off with trackers. But over different periods, figures can tell a different story.

Broadly speaking, if you are nervous about a fund manager making calculated gambles with your cash, then a tracker might be the best bet. But if you are willing to take a chance, in the hope of higher returns, go for a carefully selected, actively managed fund.

Not all tracker funds are the same: they are supposed to mirror the performance of a stock market, but some don't come close. Compare the difference between the trackers' past performance and that of the stock market they are meant to match. Avoid funds with the highest margins of error.

Rob Page, marketing director at fund manager New Star, says: "Ignore fashion and spread the risk. New investors should consider an equity income fund.

When income is reinvested on Tracey Mouna is a model growth investor - she knows that seeing her pounds 3,000 investment grow will require patience.

these investments, they deliver good returns - the average over the sector is 74 per cent growth over five years."

Isa charges can vary from a 0.3 per cent annual management charge a year for a passively managed tracker to up to 5.5 per cent for sector-specific, actively managed funds. Expect to pay an initial set- up fee of up to 5.5 per cent, though charges can be reduced by going to a discount broker. These firms, which include Hargreaves Lansdown and Torquil Clark (www.tqonline.co.

uk), rebate a proportion of what they could earn in commission from Isa providers against your charges.

The 31-year-old South Africanborn student is set to graduate in a business degree. She may have some time on her hands, but she does not check how her Isa is doing every week. She says: "I probably don't check it enough, but I don't think it's a good idea to check too often. You have to accept that it's going to take some time for your original investment to go up."

Tracey, who lives in Kensal Green with her husband, Ali, made her first Isa investment in 2000 through a Virgin FTSE 100 Tracker. This year, she has a further lump sum to invest and is considering an actively managed fund.

She says: "I wasn't aware of all the choice, but my main aim was to find somewhere to invest in that would hopefully give me twice the returns of a savings account with little risk."

In an ideal world, Tracey would like to see her investment deliver a return between eight and 10 per cent. As yet, she doesn't have a pension - she looks upon her Isa investments as building up funds for retirement, so is committed to taking a long-term view for growth. "Seeing your money go down is a chance you take to get better returns."

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