How to Invest in and Manage an ISA

A basic explanation about how to invest in an ISA and how to manage your money within this tax-efficient wrapper

Holly Cook 11 March, 2013 | 7:00AM
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This article is part of the special series, Investing with ISAs. To learn about ISA basics, read "All About ISAs for 2012-2013".

How Do I Invest in and Manage an ISA?

The maximum that you can put into an ISA account for the 2012-2013 tax year is £11,280. In the 2013-2014 year, you can put in up to £11,520. (Each tax year runs from April 6th until April 5th of the following calendar year.)

You can own a cash ISA, which can hold up to £5,640 for the 2012-2013 year; or you can put the whole amount into an investment-focused ISA. Alternatively, you could go for a mixture of the two, primarily investing your money in shares and bonds but also having a portion—up to half the total annual allowance—in cash.

Each year you can subscribe to one cash ISA and one stocks and shares ISA. You cannot subscribe to more than one cash ISA or more than one stocks and shares ISA in the same tax year. However, you could feasibly open multiple ISAs over multiple years, and you do not need to stick with just one ISA provider.

If you want to transfer your ISA to a different provider, you must arrange this directly with your current provider and you should check about any potential charges for transferring. You cannot arrange a transfer on your own by closing your first ISA and opening a new one. You can also move money from your cash ISA into a stocks and shares ISA, but the money cannot be moved the other way around, from stocks and shares to cash.

Selecting your ISA provider is down to personal choice. Both the FSA and the HMRC websites provide details of ISA providers but you could also use a fund platform. This would enable you to keep all your investments in one place and to also benefit from the choice of funds offered by various investment houses via the platform.

How Can Morningstar Help Me Make ISA Decisions?

At Morningstar, we’re strong advocates of investing in funds (OEICs, closed-end funds, ETFs, etc) because they help you diversify your portfolio--you’re not putting all your eggs in one basket. Closed-end fund providers are increasingly ISA friendly while Morningstar’s ISA Fund Quickrank can help you research over 4,000 ISA-eligible OEICs.

To help you pick the right investments, Morningstar rates funds and stocks using three easy-to-use ranking systems:

- The Morningstar Star Rating system for funds gives ratings based on how well a fund has performed compared to its peer group over the past three years. The system also adjusts for risks, giving riskier funds lower star ratings. While a high star rating is promising, this is not a sufficient basis for investment decisions, since the star rating is only based on past performance.

- Morningstar also has Star Ratings for stocks and shares, but these ratings operate slightly differently compared to Star Ratings for funds. Morningstar’s Star Rating for stocks tells you whether our analysts think a stock is under- or over-valued by the market. So if a stock has five stars, this would indicate a potential buying opportunity, but if a stock has just one star, this would indicate our analysts think the market is overvaluing that stock.

- Morningstar Analyst Ratings for funds and investment trusts are qualitative, forward-looking ratings that provide investors with our independent view on what role a fund should occupy in a portfolio and how successful it might be at achieving its goals. Analysts give these ratings—Gold, Silver, Bronze, Neutral and Negative—based on in-depth analysis of a fund’s strategy, fees, management, performance and provider. These ratings are not used for stocks.

The information contained within is for educational and informational purposes ONLY. It is not intended nor should it be considered an invitation or inducement to buy or sell a security or securities noted within nor should it be viewed as a communication intended to persuade or incite you to buy or sell security or securities noted within. Any commentary provided is the opinion of the author and should not be considered a personalised recommendation. The information contained within should not be a person's sole basis for making an investment decision. Please contact your financial professional before making an investment decision.

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About Author

Holly Cook

Holly Cook  is Manager, Morningstar EMEA Websites