The advantages of investment company regular savings

So did you make the end-of-tax year deadline for using your individual savings account (ISA) allowance?

Why not make a new year’s resolution (a new tax year’s resolution that is) not to leave your ISA planning to the last minute in future – partly for the sake of your blood pressure, but more because early bird advantage often translates into financial gain.

Act in haste, repent in leisure

For one thing, investment decisions made in a rush to net a tax break, rather than as part of sound portfolio planning, often turn out badly. But also, the numbers are on the side of those who invest early.

Many investors don’t have enough spare cash to use their full ISA allowance in one go on the first day of the financial year. But you can still make a start – the regular savings schemes run by investment companies allow you to drip feed as much or as little as you can afford into these funds each month. At many closed-ended funds, the minimum monthly investment is as low as £20.

The power of regular savings

The statistical phenomenon known as pound-cost averaging makes regular savings schemes particularly attractive – the idea is that your fixed monthly investment enables you to exploit market volatility.

Imagine investing £15,000 at the beginning of the year in an investment company where the share price is £10 each – you’d have 1,500 shares in the closed-end fund. Now imagine instead that you invest your £15,000 in 12 monthly instalments of £1,250. In the first month, you buy 125 shares, but by the second month, the investment company’s share price has fallen to £9.75 and your money buys you 128 shares in the fund. A smaller proportion of your money than with a lump sum is affected by the dip in value plus your money is going further – the same fixed investment buys more shares, which will hopefully then benefit from a recovery.

If markets move in the right way, the effect can be powerful. At the end of the year, you may end up with more shares in the investment company than the lump sum would have delivered, and growth on your capital even during a period of flat performance. Pound-cost averaging doesn’t always work this way, but it can smooth out the peaks and troughs of markets.

The investment company sector pioneered regular savings schemes of this type and the majority of funds offer the chance to invest this way. It’s a really sensible way to use your ISA allowance as part of a carefully planned investment strategy – plus next year, you’ll avoid the panicky last-minute rush.