Many investors wish to benefit from positive movements in the FTSE 100 index, but they worry about the downside. Nobody wants to lose all their money on a stock market investment, but tracking an index of blue chip stocks is very different to purchasing penny shares.
According to an article about FTSE trackers in the Motley Fool, “Over the last 80 years, there have been only seven five-year periods where you would have lost out and in only two of these cases would you have lost more than 10%.”
Advantages of a Capital-Protected FTSE Tracker
- Capital protection. No matter how badly the FTSE 100 index performs, it is impossible to lose all or any of the investment capital;
- Stock market growth. An investor benefits from investment returns linked to the growth of the stock market;
- Low and falling interest rates. Bank of England base rates are the lowest in decades. Fixed-rate bonds and cash ISA accounts aren’t providing savers with the returns they once did so guaranteed equity bonds provide a more financially rewarding alternative;
- Can be put in an ISA. It is possible to benefit from tax-free savings by investing up to £7,200 in a stocks and shares ISA.
Disadvantages of a Capital-Protected FTSE Tracker
- No dividends. A FTSE tracker only follows the value of the index. This means that an investor can lose out on receiving 4% per annum in dividend payments;
- Capped gains. As the investment is capital-protected, potential gains are usually capped meaning that only modest returns are possible;
- Long-term investment. All investors in a capital-protected FTSE tracker are locked in for a period of 3 or 5 years;
- Taxation. Any money made isn’t subject to capital gains tax, it is subject to income tax. Worse still, the income all comes in a single financial year which could cause an investor to become a higher-rate tax payer.
Using a Stocks and Shares ISA for Tax-Free Savings
It is possible to put a capital-protected FTSE tracker in a stocks and shares ISA. Inland Revenue rules permit someone to invest up to £7,200 in this source of tax-free savings. This affords an investor considerable advantages, especially if a higher rate tax payer.
The reality is that those who invest in the FTSE 100 share index after a decline will do well. A simple FTSE tracker fund is definitely the way to go, but not everyone has the constitution for this. If this is the case, put a capital-protected FTSE tracker in a stocks and shares ISA to maximise tax-free savings.