Fund sales leap threefold

INVESTORS are returning to funds that invest in bullish UK shares, according to the latest industry figures. But many are choosing to shun tax-free Isa wrappers.

The Investment Management Association said sales of equities-focused funds had 'thrived' in February. The 'UK all-companies sector', home to some of Britain's largest growth funds, accounted for 25% of sales to individual investors – the highest level since April 2002.

British-orientated corporate bond funds and equity income funds were also popular. The least popular sectors were UK smaller companies and UK equity and bond income.

But the figures also revealed that net sales of funds within Isas are only 10% higher than a year ago at £209m whereas funds sold to individual investors leapt more than three-fold to £717m.

The run-up to the 6 April tax deadline has previously kick-started a rush to invest in Isas. Investors lose the year's £7,000 allowance unless they invest before that date.

However, a complex change in the tax treatment of dividends paid by shares-based funds, from April, means that Isa funds have little benefit to many investors – particularly basic-rate taxpayers who also do not expect to crystallise massive gains and therefore don't need to shelter returns from capital gains tax.

The industry has warned that negative publicity from the change might damage sales. Fund companies have continued to argue the case in favour of Isas.

Richard Wastcoat, managzing director of the UK arm of fund giant Fidelity, said: 'Isas will continue to offer shelter from CGT and income tax. This means higher rate tax payers will have no additional income tax liability and basic rate tax-payers can ensure that their investments remain sheltered from tax should their circumstances or tax rates change. And, of course, there's no need for investors to declare their Isas on their tax returns.

'We believe Isas remain a worthwhile and valuable long-term savings vehicle for many people.'

Independent finanical advisers agree. 'It makes more sense to use an Isa than to not use one,' said Patrick Connolly of adviser John Scott & Partners. He also pointed out that corporate bond funds will continue to pay a 20% tax credit on dividends.

However, investors should note that unlike unit trusts, investment trusts and self-select Isas carry extra charges. Investors should weigh up whether the extra costs of the wrapper