Hatch a savings nest-egg

By SYLVIA MORRIS, THIS IS MONEY AND DAILY MAIL SAVINGS EXPERT
Updated: 19:00 EST, 17 April 2001

REGULAR saving - either into a deposit account or higher-risk bonds and shares - is the only way to convert income into capital. More than two million savers put money aside each month into funds investing in shares to build up a lump sum for the future. And regular savings plans also give those with a lump sum the chance to put money into the market gradually - a practice tipped to gain popularity because of the current volatile stock market.

Regular stock market investment
SOME investors nursing falls of more than 40% over the past 12 months have turned their back on the stock market, loath to invest more money at a time when the market could fall further. But ignoring share-based investments because the past year has looked so bad could mean missing out on future growth.

The FTSE 100 index, which measures the performance of the largest UK companies, now stands at just under 5,800 - but five years ago it was just 3,725. Since the beginning of last year, it has hit a high of 6,798 before diving to a low of 5,314 earlier this year - a fall of 22%. As this shows, stock markets tend to rise over the longer term, but can bounce all over the place on the way. By drip-feeding in your money, you smooth out the peaks and troughs.

The advantage of regular savings when markets are volatile is that you buy more shares or units when prices are low and fewer when they are expensive for your fixed monthly sum, over the years bringing down the average price of each share or unit.

Patrick Connolly, of independent financial advisers (IFA) Chartwell Investment, says: 'Investing on a regular basis is becoming more popular now that markets are volatile. It allows investors to move a step or two up the risk scale because timing is not a major consideration.'

For regular savers looking to build up a lump sum, Mark Dampier, of IFA Hargreaves Lansdown, warns: 'Look to save for at least ten years to gain the best of your plan. You need to be self-disciplined not to cash it in after a couple of years if, for example, you move house and need the money. And don't give up just because you have one bad year.'

You can invest in funds - either unit or investment trusts or open-ended investment companies (Oeics) - for as little as £20 to £100 a month. And you can put your money in all the world's main markets. These funds open up the world of shares by pooling money from individual investors and appointing a fund manager who picks shares for you.

But the service does not come without a price. There is typically an initial charge on a unit trust or Oeic - which can be as high as 5.5% of your money - and an annual charge of 1% to 1.5% of the value of the fund.

Investment trusts are cheaper because dealing charges can be less than 1%, plus stamp duty. But unlike with Oeics and unit trusts, there is often an extra charge for the Isa wrapper.

If you had put £50 a month over the past ten years - a total of £6,000 - into an average performing UK unit trust, you would have accumulated more than £10,860 even without the tax breaks on an Isa, figures from performance analyst Lipper show.

Susan Brown puts £100 a month into Witan investment trust. She started saving five years ago and switched her plan to a tax-free Isa when these plans were introduced.

Susan, who works at her local hospital, says: 'I am saving for the long term, so I do not mind taking a risk with my money over the shorter term. One of my reasons for saving is the children's further education.' The £1.5bn Witan investment trust invests in shares in world stock markets. Charges include a 1% dealing fee on buying the shares plus stamp duty, while Mrs Brown pays an additional £30 plus VAT to wrap the investment up in an Isa. The fund has risen 62% in the past five years.

Once you start a regular savings plan, keep an eye on how your fund is doing. You can switch to a new fund in the years ahead to widen your investments.

How to buy
IT IS better to buy a regular savings plan through an IFA, a discount broker or a fund supermarket rather than approach the fund management group direct.

IFAs will give you advice on which funds to buy and how to build a portfolio. They will be paid out of the initial charge on the fund - typically 3%. Discount brokers give no advice but merely buy on your instructions. They will generally rebate the 3% you would otherwise pay for advice. If you go directly to the fund management company, you will pay the full initial charge, even though you have had no advice.

Allenbridge, Bestinvest, Chartwell Investment, Hargreaves Lansdown, Chelsea Financial Services and TQ Direct are among the largest discount brokers and give rebates to regular savers. Allenbridge, Chartwell Investment, Hargreaves Lansdown and Bestinvest also give independent financial advice. Bestinvest gives a full advice service and rebates the initial commission.

The recently launched fund supermarkets open up the investment playing field, as they allow you to spread your Isa money around several fund managers rather than sticking to one a year. But while they are more flexible as to which funds you can hold, the initial fees can be higher than going through a discount broker.

Fidelity Funds Network, a leading supermarket, does not offer regular savings on its scheme yet. Some discount brokers and independent financial advisers offer regular savings through its major rival, Cofunds. With Egg, you need only £20 a month to sign up on its super-market schemes.

What the experts recommend
Mark Dampier, Hargreaves Lansdown: First-time investors: Large investment trusts such as Foreign & Colonial, Witan and Alliance which invest in international markets.
Seasoned investors: Colonial First State Global Health and Biotechnology fund.

Patrick Connolly, Chartwell Investment: First-time investors: HSBC UK Growth & Income, or Govett European Strategy for those wanting a higher-risk investment.
Seasoned investors: The lower-risk Schroder European Fund or the higher-risk Franklin Templeton U.S. Aggressive Growth.

Michael Owen, Plan Invest: First-time investors: HSBC UK Growth & Income, Newton Income or, slightly higher up the risk scale, Fidelity Special Situations. Seasoned investors: Investec European Portfolio or Gartmore European Selected Opportunities.

Pascal Matic, Unitas: First-time investors: Fidelity Wealth Builder which gives you good global spread of investments.
Seasoned investors: ABN Amro UK Select Opportunities, Fidelity Special Situations, Schroder Medical Discovery and Framlington Health.

Cash
IF you are not willing to invest for at least five years and are starting off on the savings ladder, look to the safety of a cash mini Isa. These pay much better rates of interest than run-of-the-mill savings accounts, and the interest is tax-free.

Best deals include 6.35% from Coventry Building Society and First Direct on £1 and Nottingham Building Society on £500, and Nationwide's 6.2% on £1. Smile pays 6.5% for those willing to run the account over the internet.

All give you easy access to your savings, and allow regular savings. You can invest up to £3,000 in a cash mini Isa this tax year.

The Association of Unit Trusts and Investment Funds (tel: 020 8207 1361) and the Association of Investment Trust Companies (tel: 0800 085 8520) have fact sheets on regular savings.