Stocks & shares ISAs still outshining cash ISAs

Investors have been assured that stocks & shares ISAs continue to outperform cash ISAs despite delivering noticeably weaker returns over the past year.

According to the latest research from Investment Life & Pensions Moneyfacts, the average stocks & shares ISA fund has delivered growth of 4.8% in the current tax year to date, significantly lower than the 20.4% posted in the previous tax year.

Yet despite the dramatic drop-off compared to a year earlier, the return is still considerably higher than the average interest rate paid on cash ISAs during the current tax year of 0.97%.

The research also points out that the subdued headline stocks & shares ISA return masks some strong individual fund and sector performances. In particular, Japanese Smaller Companies (with average growth of 25.5%), China/Greater China (24.7%) and UK Smaller Companies (15.3%) have all excelled during the current tax year and delivered stellar returns for investors.

Importantly for investors, the vast majority (83%) of the 945 ISA funds surveyed have delivered growth over the past 12 months.

And even more crucially, the case for investing in stocks & shares ISAs over the long-term remains compelling, given that the average fund has grown by 251% in the 19 years since the introduction of ISAs.

"Even though the 2017/18 tax year has been a more difficult environment for stocks & shares ISAs, they are still outshining the returns offered by their cash equivalents," said Richard Eagling, head of Pensions and Investments at Moneyfacts. "The nature of investing in the stock market will always involve fluctuating returns but the long-term performance of stocks & shares ISAs remains attractive."

What next?

Interested investors need to appreciate that investing in the stock market does come with certain risks. There's no way to guarantee that you'll be able to achieve the average investment performance, and you might even end up with less than you put in if you (or your investment manager) invest your funds in the wrong places.

That said, there's no reason not to consider an investment ISA if you're comfortable with the risk. And crucially, investments are meant to be kept for the long-term, meaning five years is probably the minimum length of time you need to be thinking about committing your money, giving your funds plenty of time to weather any market volatility. As you can see, the end-result could be quite lucrative.