Choosing a S&S ISA fund

mbbetter

As per the thread title,


I’m looking to invest around £150 a month into the stock market in an ISA. My preference is for income investing (just personal preference.) Initially I was looking to buy individual stocks in dividend paying companies, but given my level of investment it just isn’t practical or cost effective. I now think an investment fund is the way to go. But how do I go about picking one for my needs with the 1000s that are out there?


I take it an income based fund does actually pay income (dividends).


Cheers

Linton

Funds come in two varieties: ACC and INC. The ACC funds reinvest dividends and the INC funds pay them out as cash. Some income funds will generate dividends and some interest. If you go for equity income funds you will get dividends.

To look at the full list of such income funds go to https://www.trustnet.com and choose the "UK Equity Income" sector to produce a list of funds. This will give you the current % dividend and the performance over the past few years which may help you decide which funds to choose. The most popular have been the Invesco Perpetual Income and High Income funds managed by Neil Woodford who is regarded as a star manager and has achieved very good results over the years. Whether you want to go for a very popular fund and believe in star managers is up to you.

mbbetter

Thanks for the response - much appreciated this is great information.

A quick question on the dividends from a fund and how these differ from individual shares.

The thing I like about dividend paying shares is that the dividend (may) remain the same even if the value of the shares full. Can this also happen with funds, or is the dividend calculated on the value of the fund? eg buy a fund at 100p it pays a 5% divided of say 5p. If it then drops in value to 50p will the dividend then be 2.5p?

I hope this makes sense? As mentioned shares such as Vodaphone seem attractive to me as I could lose captial, but still make a good % from dividends.

Cheers,

Any

With both shares and funds, the company only pay dividend they can afford. If value of a share falls it might be because of bad results and if there are no profits there is also not much cash to pay divi.

The same applies to funds. Big strong shares such as Vodafone as you point out will pay divis even in fall times, most big strong funds will too.

And yes, with funds you buy "units" of each fund. Just like you buy number of shares. So even if the fund unit value might be falling, dividends are paid per each unit, not per value of fund.

Any

INC (income) vs ACCU (Accumulation) funds..
If you are just investing right now for future, you would probably pick accumulation fund... so any divis/interest that is paid will automatically be used to purchase more units of the fund.

Most funds have both - accu and inc variants.

Or you can buy income ones and if your provider allows, set it to re-invest all monies back in again.
The result is the same.

Unless of course you need income now?

mbbetter

Thanks very much for your help - much appreciated.

This looks the route to go for me. Fees would kill me trying to build a portfolio of individual stocks.

Off I go to somewhere like HL and buy a couple of funds. I'm thinking 4 different funds at £50 a month and see where I am in 36 months time.

Cheers all

Any

I only started last year myself, also with HL.
They have large fund offering and their site is easy to navigate around.
Though they do have monthly fees on some of the largest tracker funds (passively managed funds, where computer just imitates stock movements).

Though warning - it is addictive! I started off with £50 and actually ploughed in every penny I could in the last 3 months... £200 a month!

xylophone

A quick question on the dividends from a fund and how these differ from individual shares.

Have a look at this as an example
http://www.hl.co.uk/funds/fund-discounts,-prices--and--factsheets/search-results/i/invesco-perpetual-high-income-income
http://www.trustnet.com/Factsheets/Factsheet.aspx?fundCode=PPHI&univ=U&pagetype=dividends
The value of the units goes up and down with the market but the income depends on the number of units you own at the ex dividend date and the declared dividend.
The amount of the dividend depends on the decision of the fund manager.


If you own shares in a particular company, you receive the declared dividend according to the number of shares you own at the ex-dividend date.

The value of each share goes up and down with the market but you still receive the declared dividend. The amount of the dividend depends on the decision in this regard made by the company.

mbbetter

I can see where you are coming from, but anyway addictive saving is a good thing.

Will be interested to track your progress.

Right now I’m not looking for massive returns. I’d be happy with anything over 2 % right now as it will be in a tax free isa (appreciate this is rubbish and inflation would kill it.) A few things are still questions outstanding

1. How does the market set the price of a fund, is it all just based on past performance, reputation and the current portfolio?
2. What happens if fund manager Billy Big Blox decides he wants to leave the firm to go big game fishing – does the fund value then tank in value? (or increase if he/she was rubbish)
3. What happens if the fund firm just collapses due to bad management or other – what happens to the equity?

Any

Funds buy shares, bonds etc in different companies and the value of the fund is the amount these holdings are worth.

ALWAYS look what a fund is holding, where and if you are happy with their strategy. Never buy something of pretty number - for example I currently buy into number of things, but also couple of risky investments, such as small companies with managers that have good track record and I trust that they don't buy into a lemon and I also go a lot into US at the moment as I believe there will be a growth.
These are my believes about the economy and the future. So I buy into those too.

Just because manager leaves fund will not go down in value - if the new manager is not as good as the old one then it will.

I also look at the past performance, as an indicator.. Compare it with other funds in the same category (for example how much they lost in the bad times 2007/2008 when markets took tumble in comparison to others), but past performance is no guarantee to future performance. It is just part of the decision.

Linton

mbbetter wrote: »

I can see where you are coming from, but anyway addictive saving is a good thing.

Will be interested to track your progress.

Right now I’m not looking for massive returns. I’d be happy with anything over 2 % right now as it will be in a tax free isa (appreciate this is rubbish and inflation would kill it.) A few things are still questions outstanding

1. How does the market set the price of a fund, is it all just based on past performance, reputation and the current portfolio?
2. What happens if fund manager Billy Big Blox decides he wants to leave the firm to go big game fishing – does the fund value then tank in value? (or increase if he/she was rubbish)
3. What happens if the fund firm just collapses due to bad management or other – what happens to the equity?

1) The value of a fund is simply the value of all the investments it holds. It therefore does not depend on past glories or future hopes.

2) There are several schools of thought on this. One theory is that some managers have golden hands and when they leave the fund suffers. I can think of one very good example. Another theory which I hold is that what determines a funds success is the appropriateness of the investment style to the prevailing conditions. So a high profile fund manager may move on but his disciples can continue to provide the same returns. The third theory is that its all random anyway so you can make no assumptions.

3) The fund is held separately from the finances of the fund manager. Typically if the fund management company disappears another company will take over management of the fund possibly merging it in with one of their other funds. You wont lose your savings.