Whether you are saving for a wedding, your child’s university tuition or your pension pot, investing in an individual savings account (ISA) is one of the best and most tax-efficient ways to put away your hard-earned money.

There is a plethora of ISA providers and products to choose from and selecting the right one can be a daunting experience for most investors.

A basic starting point is to differentiate between ISAs that are based on stock market investments and those linked to cash deposits. Although you can take money out of your ISA at any time, in effect equity ISAs are not as easily accessible as cash ISAs, since equity investment should be viewed as a medium- to long-term strategy. But if you are content to lock your money away for a while, they are an ideal form of investment.

Staying competitive
Looking at whether the equity ISA provider offers competitive charges is a good place to start. ‘The biggest impact on anyone’s investment contract, particularly ISAs, is the initial charge and annual management charges,’ says Ashley Clark, director of Needanadviser.com. ‘As a broad rule of thumb, initial charges range from three to five per cent, while ongoing annual charges are 1.5 per cent per annum on average.’

Initial charges can be quite expensive but there are ways to avoid paying such high fees. Some independent financial advisers, for instance, will negotiate the fee down on your behalf. ‘If you invested through an IFA and you engaged them on a fee basis, I would expect they could slash the initial charges by three per cent. While that doesn’t seem a lot, in the long term year-on-year charges can run into hundreds of pounds,’ says Clark.

Choosing the right provider is crucial and this depends on how much control you desire and the type of investments you want to put into your ISA. If you go direct through one provider or bank, you could be restricted to investing only in their brand of funds. ‘If you buy from a fund manager you can only choose from the funds that they offer, but if you go via a stockbroker the world’s your oyster,’ says Ian Benning, product development manager at The Share Centre.

If you want to make your own choices, investing in an equity ISA via a fund supermarket is an effective and cost-efficient way to go about it too. However, some fund supermarkets have restrictions, so it is important to do thorough research. While they provide a range of funds, some supermarkets don’t provide facilities for customers to invest in individual shares. ‘If you go to Fidelity FundsNetwork or Cofunds, they don’t do investment trusts or individual shares,’ says Mark Dampier, head of research at Hargreaves Lansdown. ‘So you really have to decide on the platforms that are suitable for you in terms of what you want to deal in.’

‘Fund supermarkets and discount brokers offer low charges and an extensive choice of available investments – from stocks and shares to funds and bonds,’ says Rebecca O’Keefe, head of fund management at Interactive Investor. ‘Investing online is quick
and easy, and fees and charges are really competitive.’

A wide choice
With fund supermarkets such as Fidelity FundsNetwork, Interactive Investor and Cofunds, users have access to hundreds of funds managed by different financial institutions. Such variety cannot usually be accessed if you go through a traditional fund manager or high-street bank. Private investors can usually only access these services via a financial adviser, but Fidelity’s service and interactive investors website is open directly to members of the public.Initial charges vary here too. For instance, Fidelity FundsNetwork’s initial charges can go up to 1.25 per cent.

‘It is worth considering a few key details about what you want to buy within your ISA and how often you want to trade,’ adds O’Keefe. ‘This will give you a good idea of which is the most competitive ISA provider. In addition to the standard dealing charges and initial commission costs, other key considerations are an ISA administration fee, which can range from nothing to thousands of pounds, and inactivity fees.’

Once you have chosen a provider, you have to determine what your risk profile is and in which sectors you want to invest. The level of risk you take on should depend on your age, how long you have to invest and what you are saving towards.

Going your own way
If you wish to do your own research, you should look up the investment market commentary of a range of fund managers and financial advisers. ‘Broadly speaking, if you have a list of around ten or 20 reports, you can get an idea about which sectors are going to do well,’ says Clark. Fund supermarkets provide lots of information and tips on which sectors and funds will perform well.

‘For investors looking for additional help when making their fund selections, Interactive Investor provides ready-made ISA selections such as eastern and emerging markets and “hot spots” selections – as well as more mainstream UK equity and growth selections.

This allows users to choose a region or style of investment and then invest in a number of different funds,’ says O’Keefe.

Mark Dampier encourages risk-loving investors to invest in Asia. ‘I would look at Asia under providers like Aberdeen Asia Pacific and Melchior Asia Opportunity,’ he says.
‘The eastern and emerging markets package has grown 46 per cent over the past year against a sector average of 27 per cent growth, and our hot spots package has returned 13 per cent growth versus a sector return of four per cent,’ adds O’Keefe.

For more cautious investors, advisers recommend sticking to sectors they are familiar with. ‘Emerging markets are still an interesting sector but I wouldn’t write off the UK,’ says Dampier. ‘A solid UK fund, like the Schroders UK Alpha under Richard Buxton, is a good fund to start with. For people who don’t want to make a lot of decisions, they could buy a global growth fund like Artemis Global Growth or Neptune Global Equity Alpha.’

Alternatively, if you know which funds you are after and the sector you want to invest in, most supermarkets have search facilities to help you find them. ‘We provide a fund filter that searches more than 1,300 funds,’ says O’Keefe. ‘Investors can search by fund provider, sector, performance and risk rating. Using these services, customers can buy online in less than ten minutes.’

If you know what you want to invest in, you can opt for a self-select ISA. These are offered by stockbrokers and online share-dealing sites such as The Share Centre. You can buy up to £7,000 worth of shares for your ISA (£7,200 in the 2008/09 tax year) but there will be costs associated with buying and selling the stocks, which will be added to your ISA wrapper.

The cash alternative
If you want lower-risk access to your money, going for a cash ISA is the best bet. One of the most obvious things to look at when choosing a cash ISA is whether it comes with a good rate of interest. Currently, cash ISAs offer rates over five per cent. ‘National Counties Building Society currently offers 6.26 per cent, while Egg and National Savings & Investments offer 6.05 per cent,’ says Terry Cutworth, senior savings researcher for Moneyfacts.

Some mini-ISA providers may include a bonus rate of interest for a certain amount of time to lure customers, but the rate usually drops after the offer period is over. The key here is not to fall for what appears at the top of the current charts, as this may not be
the right choice in the long run.

‘Some ISA providers encourage regular and early investment with discounts, while some offer discounts at the end of the tax year to entice latecomers,’ explains O’Keefe.
‘You have to choose providers that are consistent with their rates, such as Kent Reliance and National Savings,’ adds Dampier. ‘What appears to be the best now won’t be the best later. Bonus rates just suck you in and then you can be stuck with a low rate later on.’

Know what you’re buying
It is important to look at the fine print before selecting your ISA. One of the factors that should be taken into account is how accessible your money is. ISAs can be managed in the provider’s branch, over the telephone and internet or by post, but some providers don’t offer all these ways to administer the fund. With cash ISAs you can be restricted in the number of withdrawals you are allowed to make before you risk losing interest on your account.

Of course, if you want to tie your money in for a long period you can get a higher rate of interest from accounts that require you to give a period of notice. It is all down to your individual needs.

Some providers include extra incentives if you invest with them, but this shouldn’t be one of the major deciding factors. Britannia, for instance, gives its customers reward points, which are paid out each year.

Before buying an ISA it’s important to look at the charges, rates, range of funds available and the terms and conditions. Remember that the rules for ISAs may be changing, but if you don’t use your ISA allowance for this year before 6 April 2008, you will lose it.