Charges cut at the pick 'n' mix counter

The end of the tax year is looming and financial institutions are counting the cost of the falling stock market – far fewer investors buying stocks and shares-based ISAs.

The end of the tax year is looming and financial institutions are counting the cost of the falling stock market – far fewer investors buying stocks and shares-based ISAs.

For those brave enough to keep buying shares, however, general unit trusts, open-ended investment companies (Oeics), investment trusts and similar funds continue to be the preferred way of going into the markets without taking too many risks.

The big disadvantage of these funds, though, is the initial charge you have to pay and the annual fee that continues as long as you hold the investment. Both can be quite steep and, in the current market conditions, most of us want to save money. This is where online "fund supermarkets" come in.

The supermarkets are web- sites that let you invest in collective funds, such as unit and investment trusts, often at cut-price initial charges. The annual management fee, up to 1.5 per cent, usually remains the same, and remember that over longer periods this has a greater effect on a fund's value than the initial charge. But it is still worth getting the fund for a lower initial charge, even if you have to pay the management fees later on.

If you know something about investment and feel confident enough to buy your own products without advice, fund supermarkets can not only save you cash because of their lower charges, they can make it easier to put together a personalised investment portfolio. Each site has its own ISA shopping basket which you can fill with a variety of funds from several management groups, and then buy them pre-wrapped in a tax-free ISA.

Most supermarkets let you invest a minimum lump sum of £1,000 in each fund. So if you invest your full £7,000 ISA allowance, you can choose up to seven funds from different providers. Alternatively, some sites enable you to invest on a monthly basis.

Fund supermarkets were introduced to the UK in 2000 but they have been popular in the US for many years.

They work on the same basis as high-street supermarkets: because of the volume of the funds they sell, everything is available at wholesale prices.

In most cases, when buying direct from a fund provider, you would face an initial charge of between 4 and 5.5 per cent. Through a fund supermarket, you can often pick up exactly the same funds with an initial charge of less than 2 per cent; in some cases, the charge is waived altogether.

There are plenty of supermarkets to choose from. Among the best known is Fidelity's Fundsnetwork (www.fidelity.co.uk/direct/ select/fundsnetwork), which offers 830 funds from 55 management groups. FundsDirect (www. fundsdirect.co.uk) offers 1,500 funds from 80 providers, and Ample (www.ample.com) has 424 funds across 24 fund management groups.

If you have the time, and the inclination, you can trawl through them all to see which offers the best deals on various funds. Charges vary from site to site, so it's useful to look at a couple to compare prices.

The original fund supermarket in the US, Charles Schwab (www.schwab-europe. com), offers 130 discounted funds from eight fund managers. At the moment, it is giving investors even more pick 'n' mix options with its "combination" ISA.

Investments in the Schwab Combination ISA will be split equally between the M&G high-interest fund, a cash fund, and the stocks-based Gartmore UK Index fund. Will Kinsman of Charles Schwab Europe says: "The new Combination ISA in effect allows investors to hedge their bets on which way the market will go, gaining some upside from any growth but not exposing their full investment to the risk of further falls."

Some independent financial advisers have got in on the act by offering their own versions of supermarkets where you can buy funds, without advice, at discounted prices. Among these are Chelsea Financial Services (www.chelseafs. co.uk), Bates Investment (www.wiseup.com), Har-greaves Lansdown (www. hargreaveslansdown.co.uk), Chase de Vere (www.chase devere.co.uk) and Charcol (www.charcolonline.co.uk). In most cases the annual management fee is around 1.5 per cent, though Har-greaves Lansdown normally reduces this to 1.25 per cent.

Although fund supermarkets offer many advantages, business has suffered due to the overall slowdown caused by the three-year bear market. Norwich Union has closed its supermarket because of lack of demand. Egg, which at one time offered 24 managers and 260 funds, has stopped marketing its supermarket because of lack of interest, preferring to concentrate on packaged ISA products instead. But provided you choose a reputable name, your money is not at risk as it is invested with the fund manager.

The reduced initial charges on ISAs attracted Carl Harvey, head of finance for a Birmingham retail company, to Charles Schwab's fund supermarket. He bought a mini stocks and shares ISA through it this year, investing a lump sum in the M&G Securities Gilt and Fixed Interest fund.

It was the first time he had bought through a fund supermarket, and he says he would certainly do it again. "One of my staff used to work for Charles Schwab, so they suggested I have a look," he says. "I already have a mini cash ISA with the Cheltenham & Gloucester and I was thinking of buying shares too. When I found I could buy funds in an ISA at such a cheap rate, I went for it. The convenience and speed of it all is an added bonus."

As a trained accountant with an eye on market movements, Mr Harvey believes he has enough knowledge to make his own mind up without financial advice, which is why the fund supermarket concept is so attractive to him.

"I get the daily bulletins from the Motley Fool finance website, and I read the business and finance news in the broadsheets, so I think I'm a bit more familiar with it all than most," he says. "I don't think all the help you get from financial advisers is that good, although it can sometimes be relevant. I think I can find the information for myself."