Best cash ISA deals for the end of the tax year

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- Is an ISA right for you?

All figures accurate as of 31/3/2009

In a market unkind to savers, even those with money to invest are sitting tight preferring to hold out and see an increasingly low return, rather than take risks in traditionally favoured asset classes such as shares and property.

When you save you expect a modest return, generally in excess of the rate of inflation. Although it is important to have savings for luxuries and emergencies, recent rate cuts have left cash deposits offering little or no return. On the other hand, when you invest you put your money to work.

Investing, particularly in funds, means you’re making a longer-term commitment with your money, in exchange for a potentially significant increase in its value. However, there are risks involved when investing - the value of stock market investments and the income from them can go down as well as up.

There are three main reasons for investing in funds: to reduce the overall level of investment risk by spreading money more widely; to lower the cost of building an investment portfolio yourself and to reduce the need to select and manage your investments.

If you are a new investor, funds can represent an easy way into the market, especially as you can invest small amounts over time, often without significant dealing charges. And, because the funds are spread across a wide range of investments, the impact of any one of them failing to perform as expected will be less than if you’d only invested in a few individual companies yourself.

Fund tips:

While there is a wide range of funds available to investors, Parsons suggests those looking for lower to medium risk investments, should stick to funds that have proved themselves over time. Parsons points to four funds that may prove to be among the best opportunities of 2009:

Lower risk funds

1. Invesco Perpetual Corporate Bond Inc Fund

Aim: To achieve a high level of overall return, with relative security of capital. It invests primarily in fixed interest securities such as gilts and corporate bonds. This is a lower risk fund for investors seeking income returns, but willing to accept more risk than investing in cash.

Opinion: It might seem like an odd time to buy a bond fund, given the turmoil in the financial markets, but it is actually the current economic situation driving this opportunity. Some financial institutions have had to sell bonds at vastly reduced prices in order to raise cash and as such the quantity coming onto the market has caused prices to dive and yields to rise.

The most attractive thing about this fund is the yield on offer. Its distribution yield (estimate of income the fund expects to pay over the next year) currently stands at a staggering 7.01%, although this is variable and is not guaranteed. The cumulative performance for the fund over the last 5 years is 1.48% compared to its sector average of -5.27%.

Investors can invest in this fund through an ISA, which means you won’t have to pay any tax on the income or on any growth. However, as with any investment there are risks involved, and the value of the fund can go down as well as up.

2. M&G Corporate Bond A Inc Fund

Aim: To achieve a higher total return (through a combination of income and capital growth) than would be obtainable in UK Government fixed interest securities i.e. gilts and corporate bonds. This is a lower risk fund for investors seeking income returns, but willing to accept more risk than investing in cash.

Opinion: Just like the above fund, the M&G Corporate Bond Fund is likely to benefit from an increased number of bonds available on the market. M&G have long been respected for their bond funds and this fund is a prime example of one of their flagship funds.

The fund manager aims to identify those corporate bonds that reward and compensate for the potential risk of owning them. M&G is a strong fund house with a good proven track record. Those investing in this fund have the added assurance that the fund manager is backed by a team of around fifty credit analysts.

In order to help minimise risk, the M&G Corporate Bond A Inc Fund limits the exposure to any underlying asset to no greater than 3% of the fund’s overall size. The cumulative performance for the fund over the last 5 years is 15.35% compared to its sector average of -5.27%. The fund is currently yielding 4.7%.

Investors can buy this fund through an ISA.

Medium risk funds

3. Newton Higher Income Fund

Aim: This fund is designed to provide an attractive level of income together with the potential for capital growth. It invests in stocks drawn from the largest 350 companies in the UK.

This is a medium risk fund for investors seeking income returns and a good strong yield, but willing to accept more risk than investing in cash or corporate bonds.

Opinion: This fund is an ideal holding for investors seeking income as well as the potential for capital growth, especially given the current climate and depressed share prices. The Newton Higher Income Fund is currently offering a yield of 7.69%.

UK equity focused, the fund concentrates on medium and large-cap companies. It has also enjoyed a superb relative performance in a sharply falling market, of which its large underweight in financials has helped. The fund has outperformed its benchmark on a cumulative basis over the last 5 years, returning 9.81% compared to its sector average of 0.67%.

The Newton Higher Income Fund applies a strict yield factor, in that all holdings must yield 15% more than the FTSE All Share index. If it falls below this level it is immediately sold.

Investors can buy this fund through an ISA.

4. First State Global Listed Infrastructure A Inc Fund

Aim: This fund aims to achieve a total investment return consistent with income and long-term capital growth. The fund invests in a diversified portfolio of listed infrastructure and infrastructure-related securities from around the world.

This is a medium risk funds for investors seeking potential long-term growth and income from a developed global investment portfolio. Please note that this fund only started on October 2007.

Opinion: This year will be a testing time for investors. The route to prosperity lies with governments and central banks. It is therefore worth considering how they may affect industry. It seems their consensus is to spend money to encourage economic growth by filtering capital into the economy via infrastructure based projects.

Government incentive packages for the infrastructure sector may prove to be lucrative for those managers that invest in these types of projects and companies. And with equity markets looking to remain choppy in 2009 we can see the attraction of infrastructure funds.

Although the fund is designed for growth, investors maybe surprised to find that this fund currently yields 4.55%. The key to its yield is that the very nature of infrastructure projects means the underlying investments are within sectors that have predictable cash flows such as utilities.

Infrastructure funds are considered defensive as they invest in companies that own, control, develop or construct infrastructure such as, airports, sea ports, gas, electric and water utilities, toll roads and pipe and gas pipelines.