Index trackers....best buy ???

Andy,

Index trackers invest in shares that make up the index and try to track it exactly. You may get tiny fluctuations since it is very difficult for the funds to exactly match the index every day as shares go up and down and become a bigger or smaller component of the index.

The big thing to watch out for is charges - they can eat up a big percentage of your gains.

There is a government CAT standard which requires the fund to have very low rates so look out for one with that perhaps.

There is theoretically no limit on how much you can invest. However if you want to avoid paying income tax on dividends earned by your fund or capital gains tax you want to invest in an ISA. The ISA limit is £7000 in any one tax year (year to 5 April) so if you are quick you could invest £7000 this year and then another £7000 on 6 April and all would then be free from tax charges.

However, the wise investor recommends paying a regular amount in and that way you don't risk buying at the top price but spread your investment over time.

There are many different indexes too, FTSE 100 (the 100 largest UK companies dominated by Banks, Drug companies, Oil Companies), FTSE 250 (the 250 largest companies but again weighted towards the bigger ones (which make up a bigger share of the index), The FTSE all share index is the whole london market.

There are also 'actively managed funds' which are not index trackers but which aim to outperform their benchmark index and does open up a whole load of european and worldwide market if you don't want to just invest in the UK. However the fees for this type of fund tend to be higher and 75% of them don't outperform a cheaper index tracker.

One final point to think about is ethical investment. Do you want to invest in companies who operate in the global arms trade, tobacco or who have a poor environmental record. If not there are funds out there which invest in the FTSE4Good index which excludes such companies.

As for recommendations, keep an eye on the broadsheet press in the next week or so and have a look for the best deals on offer.

Personally I invest a regular amount in the direct line FTSE4good index tracker which has performed fairly well in the last couple of years.

Good luck

R.

PS - you might find this area of the motley fool website useful.

It looks as if Legal and General are refunding the fees on their trackers after 1 year which might be a good deal for you?

http://www.fool.co.uk/trackers/index.htm?ref=leftnav

what else is there besides the L&G one? any bestbuy tables?

kinster wrote:

what else is there besides the L&G one? any bestbuy tables?

The only real differences between trackers are down to charges and tracking error. You can compare funds here -

http://www.trustnet.co.uk/ut/funds/perf.asp?sort=5&ss=0&txtS=&txtSS=&columns=&page=0&booIMA=0&reg=all&sec=ind&ima=all&unit=all&type=all&gobutton=Go

Please take note of the index being tracked before comparing performance, though!

Rafter wrote:

There are also 'actively managed funds' which are not index trackers but which aim to outperform their benchmark index

Unfortunately they mostly do *not* aim to outperform the benchmark; they aim to follow it very closely, which is why, as you correctly point out, most of them do no better than trackers.

They are unit trusts/OEICs. There is no exit fee.

cloud_dog wrote:

Dunstonh

I'm intrigued........... Why did you pick Rafter up on the point about monthly saving/investing???? I would have thought that would be eminently sensible idea for a (seemingly) novice investor???

Surely your not implying you can pick the right time to invest ;-)

cloud_dog

I couldnt remember typing that. it was 9 months ago.

However, the point is valid. Pound cost averaging does reduce the risk. It also reduces the potential. If you had pound cost averaged over the stockmarket crash, you would have lost less than a single lump sum before. However, during the recovery, you would have gained less than a single lump sum made before the recovery.

Better for novices to know the pros and cons and make the choice from there.