It is a
well-known fact that cash ISAs provide many more financial benefits than a
standard bank account. However, it should also be pointed out that traditional
cash ISAs are associated with their own set of discrete limitations. This is
why a growing number of individuals from all walks of life are choosing a
stocks and shares ISA as a viable alternatives. Why is this type of ISA
preferable and what advantages does it offer when contrasted with a standard
cash ISA? Let us quickly examine these questions in detail.
The Issue of ROI Over Time
It can be argued that the most pertinent drawback of a cash ISA is 2.25 per cent. Furthermore, one caveat of this financial agreement is that the funds themselves need to be locked away for a set period of time before the associated returns are realised. 2.25 per cent is rather paltry when we take into account other issues such as inflation.
On the contrary, the average rate of return associated with a stocks and shares ISA is 15.8 per cent (1). Even conservative estimates place the ROI associated with a stocks and shares ISA in the realm of 7.5 per cent (the average growth of the benchmark FTSE on an annual basis). Thus, stocks and shares ISAs are easily able to outperform cash ISAs in terms of returns alone.
It is also important to mention the concept of diversification. As the name already suggests, cash ISAs are represented by standard cash holdings. This is in direct contrast to a stocks and shares ISA. Some of the asset classes which can be leveraged by these programmes include:
- Unit trusts
- Index funds
- Exchange-traded funds (ETFs)
- Government and corporate bonds
It is therefore clear to see that creating a diversified portfolio is well within the realm of possibility. Of course, the exact assets which can be accessed will vary from provider to provider.
Increased Rates of Return While Mitigating Risk
A final issue that should be addressed involves the notion of risk. Many individuals will opt for a cash ISA due to the misconception that stocks and shares packages are associated with a high level of investment risk. This is hardly the case. It needs to be highlighted that the majority of assets held within a stocks and shares ISA represent low-risk ventures. Common examples include index-tracking funds and unit trusts. While it is always possible to opt for liquid positions (such as small-cap stocks), the majority of individuals prefer a more cautious mindset.
While there is no doubt that cash ISAs have their benefits, the fact of the matter is that the rates of return associated with a stocks and shares ISA offer a unique fiscal edge that would not otherwise be possible. Ideal for long-term savings and perfectly suitable for building a nest egg, stocks and shares ISAs are some of the most powerful tools at your disposal.