By Charlotte Beugge

 

Investing is only for the brave, as the last 12 months switchback ride in share prices has demonstrated. But history still shows that over time, putting money into share-based investments should beat cash deposits - the most recent Barclays Equity Gilt Study showed that the average annual return in the last 111 years is 5% for shares but 1% for cash.

If you are interested in investing, don't start off at a disadvantage by paying too much. Unit trusts, the most well-known type of investment fund, have initial charges of around 5% so if you don’t get that rebated, you've got to make back 5% on your investment just to stand still. And if you want to buy shares, there are costs too: the stockbroker will want his share, and the government demands stamp duty too. Here's six easy ways of saving money when investing.

Don't buy direct

This might seem unlikely but if you go direct to the manufacturer – in this case the fund management company – to buy a unit trust, you'll pay more than if you go through a middle man. This is because the fund management company will still impose the initial charge, often around 5% if you buy straight from them.

Instead, go through an execution only independent financial adviser and you'll get this charge rebated. The best idea is to buy through a fund supermarket through an adviser, and then you can swap around your funds easily and cheaply.

Be careful about taking advice

You might need a good independent financial adviser if you have a reasonably large amount of money and don't want to manage it yourself. But if you know what fund you want to buy and only have a small amount to invest, consider going without advice. Advisers will charge fees – or be remunerated through commission paid to them by investment companies for recommending their funds – and this will eat into your returns. Going it alone by using a fund supermarket will save you money – as well as getting the initial charge back, in most cases you will also get a discount off the annual charge which can be 1.5% a year or more.

Why lose 20 or 40% straightaway on your income?

Unless you hold your investments in a tax free Isa framework, any income you get from your investments will have to be declared on your tax return and tax paid at your usual rate.

In addition, if you make large gains on your investments, unless they are held in an Isa you could pay capital gains tax on the profits. And holding investments in an Isa doesn't cost extra.

Or you could be really tax-efficient and hold your investments in a self-invested personal pension (Sipp). The tax relief boosts your investment by 20-40% (depending on your normal tax rate), although you can't get at the proceeds until you retire. Remember that a Sipp is simply a tax-efficient framework. Sipp providers often have charges for hosting your Sipp so shop around and find one that's cheap: some old-style ones can still be expensive.

Go for computer-run funds rather than expensive fund managers

While the best active managers do add value, many others fail even to keep pace with the stock market index they are benchmarked against (i.e. a mainstream Japanese fund would be benchmarked against the Nikkei index).

Instead, consider tracker funds which slavishly follow their chosen index. Even so, some trackers are far more expensive than others and have annual charges similar to active funds – even though there's no expensive fund manager and a team of analysts to pay.

You can find UK index tracking funds which charge just a tiny annual charge – look at the fund supermarkets for the best deals. Alternatively, look at Exchange Traded Funds (ETFs), which are a form of index fund but you buy shares, not units. These are very cheap -  you'll have to pay stock broking commission (but not stamp duty) when you buy them. Unlike funds such as unit trusts and OEICs (open-ended investment companies) you can buy and sell them on the day in the same way as you would trade shares.

Pick shares instead.

Investment trusts are similar to unit trusts but their structure is different in that you buy shares, not units, through a fund supermarket or stockbroker. They don't pay commission to advisers so have no initial charge, although there are management fees.

Here, if you go direct to the investment trust firm you may get a good deal particularly if you go for a regular saving scheme – the larger investment trusts including Foreign & Colonial and Alliance Trust have low cost schemes. You can hold investment trusts in Isas and Sipps just like unit trusts. As investment trusts are shares, you’ll usually have to pay 0.5% stamp duty on purchases.

Want to be a share trader?

If you're into buying shares in single companies (and are happy with the risks of doing so) then don't forget the costs involved. You'll pay stamp duty – 0.5% - plus stock broking commission. If you hold shares in paper certificated form, then it will cost you a lot more to sell them than if you hold them in a paperless nominee name (the nominee is often the stock broker).

The cheapest way to trade paperless shares is through the internet where you can find deals for less than £10 a trade, but often you’ll have to be a regular trader, which means you buy and sell shares every month or so, or pay an annual fee to get bargain basement commission rates. Usually the most expensive way to sell shares is through a high street bank or a stockbroker's office.