Index tracking funds

edindie

I am a 26 year old accountant living with my girlfriend (renting) and I’m thinking about starting investing in the stock market. The plan at the moment is to create a second income stream and/or to diversify savings.

I’m not really after any significant risk or return, and I don’t want to spend a lot of time reading financial info, so my thinking at the moment is to start saving into an index tracking fund. As far as I can tell, I can get a with dividends one if I want some income, or I can choose a capital only one if I simply want to save or hedge against inflation. If I start one it would be with a view to hold for a significant period of time.

What are the things to consider in this situation, and would you think it was worth wile at all? I have no debts (aside from student loan) and about 10k in savings as an emergency fund/new car fund/life’s savings so far.

Is it just a better idea to save into bank accounts for the next few years until I buy a house?

Rollinghome

If you're looking to buy a house then I'd suggest you stay in cash getting the best rate you can and using your cash ISA allowance. Even 3% isn't bad with inflation around zero and talk of further delines in property prices as unemployment rises.

We've seen a huge rise in equity prices since March and most commentators expect a fall back at some point so don't expect the last 9 months to be repeated. The more cautious fund managers are now holding a large part of their portfolios in cash.

If you still wanted a tracker fund be sure the AMC is no higher than 0.5% and consider a savings scheme where you could drip feed your money in, possibly within an ISA wrapper. An alternative to a UT would be an ETF but you would then have dealing charges. You could go for a FTSE 100, FTSE All share or FTSE 250 tracker. The FTSE All share index would give you the widest spread.

delmar39

The Fidelity Moneybuilder Index Tracker is potentially the cheapest index tracker fund (I have had this for 4 years now).

However, the stock market is on the up, so you may not gain in the short term. For example, it was down at 3500, so anything invested at this point would have risen in value significantly over the past few months.

As you say it will be for the long term, then nothing to stop you starting one up, but drip feed by paying in monthly payments to ride out the ups and downs.

Golden Rule - if you need access to your cash and don't want to lose any, stick to a cash ISA. If you're prepared to lose in the short term and can afford to wait for the index to improve, then start drip feeding into a cheap index tracker.

edindie

Rollinghome wrote: »

If you're looking to buy a house then I'd suggest you stay in cash getting the best rate you can and using your cash ISA allowance. Even 3% isn't bad with inflation around zero and talk of further delines in property prices as unemployment rises.

I did think after I posted that that the best idea would be to just start with a low charge ETF, for retirement say, with low payments in every month (£50?) and then just save up the rest as cash.

However, any growth I get in the next 2-5 years will probably be negated by the increased interest payments I would need to make as a result of a (slightly) lower deposit.

I've been thinking about investing in an ETF for a year or two but never go round to it/thought I'd invest when the second dip came. However I can see that this is a silly strategy as I only plan on investing monthly sums (assuming this is possible) and waiting until the market bottoms out again would realistically just mean never getting in. Plus, as it is intended to be a retirement investment, any fluctuations now is going to make !!!!!! all difference to the final figure.

edindie

delmar39 wrote: »

Golden Rule - if you need access to your cash and don't want to lose any, stick to a cash ISA. If you're prepared to lose in the short term and can afford to wait for the index to improve, then start drip feeding into a cheap index tracker.

What I've said in the above post aside, can you wrap index trackers up in a pension wrapper and get tax savings?

delmar39

edindie wrote: »

What I've said in the above post aside, can you wrap index trackers up in a pension wrapper and get tax savings?

I'm not sure to be honest, but I know you can wrap it up in an ISA, so tax free. There should be some info on the main site re this. I remember reading something suggesting that it was pointless wrapping up an index tracker in an ISA. Mine is in an ISA wrapper.

Re monthly investments, £50 sounds fine at the moment. If the stock market is low I tend to increase my monthly payments. I invested in my index tracker when the stock market was in excess of 6000 so hence to say I'm still running at a loss with one of my financial year investments, but because I've invested monthly for 4 years, overall I've gained by about 7% - not bad in the current climate and will get better as the stock market rises.

So, invest what you can now at your £50 benchmark level and if the stock market takes a dip increase your monthly payments above this if you can.

Lokolo

edindie wrote: »

What I've said in the above post aside, can you wrap index trackers up in a pension wrapper and get tax savings?

You could do it in a SIPP I suspect? I don't think you will get free of tax but you will obviously get tax relief when you put the money in in the first place.

Rollinghome

edindie wrote: »

I did think after I posted that that the best idea would be to just start with a low charge ETF, for retirement say, with low payments in every month (£50?) and then just save up the rest as cash.

You'd have to pay broker fees on each bargain to buy into an ETF so only really suited to lump sums. The cost advantage of an ETF over a low cost tracker can be minimal anyway. Bigger advantages if you actively trade.

edindie wrote: »

What I've said in the above post aside, can you wrap index trackers up in a pension wrapper and get tax savings?

Yes you can hold them in a SIPP and the tax advantage would depend on your position.

turbobob

edindie wrote: »

I did think after I posted that that the best idea would be to just start with a low charge ETF, for retirement say, with low payments in every month (£50?) and then just save up the rest as cash.

However, any growth I get in the next 2-5 years will probably be negated by the increased interest payments I would need to make as a result of a (slightly) lower deposit.

I've been thinking about investing in an ETF for a year or two but never go round to it/thought I'd invest when the second dip came. However I can see that this is a silly strategy as I only plan on investing monthly sums (assuming this is possible) and waiting until the market bottoms out again would realistically just mean never getting in. Plus, as it is intended to be a retirement investment, any fluctuations now is going to make !!!!!! all difference to the final figure.

Why ETF's specifically (yes you could hold ETF's in a SIPP)? What is the advantage of them for you compared to say, a stakeholder pension investing in a tracker fund?

Masomnia

Surely with an ETF you don't the advantage of the income which you can either take or reinvest. Am I right in thinking that an ETF will perform like an Income fund, but without the income? Surely you'd be better investing the money in a Acc fund instead if you want to put in a lump sum and don't need the income?

turbobob

Masomnia wrote: »

Surely with an ETF you don't the advantage of the income which you can either take or reinvest. Am I right in thinking that an ETF will perform like an Income fund, but without the income? Surely you'd be better investing the money in a Acc fund instead if you want to put in a lump sum and don't need the income?

They vary. Many ETF's distribute their income. There are a few accumulation funds now, for example this is one - http://uk.ishares.com/en/pc/funds/SWDA