It seems like a dream come true. Individual Savings Accounts (ISAs) let you save and invest, without paying tax on the profits. For those who wish to take a more predictable and conservative approach, the Cash ISA is advisable. However, while Equity ISAs provide more opportunities for earnings, is it possible to safely invest in them?

The edge of Equity ISAs

Equity ISAs are attractive on several different levels. All profits from the initial investment are safe from capital gains tax. In addition, taxpayers who pay higher rates are not required to declare ISAs on their income tax returns, or make dividend (payouts from shares) payments from their shares.

Furthermore, you can include gilts and corporate bonds in your Equity ISA. Gilts are bonds that the British Government has issued, and experts consider them to be the safest investment possible. Meanwhile, corporate bonds are certificates of debt that large companies issue (think IOU).

Maximizing returns and minimizing risks

This is significant news, as shares should be capable of outperforming other classes of assets. In fact, UK shares have produced yearly returns (after factoring in inflation) of nearly 7%. This figure is superior to both cash and gilts. Nevertheless, you can, and should, take particular steps to reduce the risks of your Equity ISA:

1. Decide how much risk you are willing to take

As an investor, you can take fewer risks for lower returns or higher risks in the hope of higher returns. With the essence of an Equity ISA and the over 2,000 funds available to insert into it, you are in the driver's seat, in terms of how much risk your ISA will have.

2. Choose funds with more shares

Investing is a numbers game. Typically, the fewer investments you include in your Equity ISA, the more risks are involved. Look for funds that are located in the "Cautious Managed" sector. A drastic movement in the fund's holding will affect a fund with fewer shares, more than one with more shares.

3. Choose a fund with multiple assets.

As you might guess, this type of fund invests in various classes of assets, such as cash, property shares, bonds, equities, etc. The advantage is that if one asset performs poorly, you will still have other assets that may not perform poorly, due to a downturn. It is advisable to have the right mix of assets that are not connected. Thus, there is less likelihood that assets will simultaneously rise and fall.

4. Bond with bonds

Bonds are a good choice if you want o play it safe. They have a fixed return, so they remain consistent when interest rates drop. In particular, consider bond funds with the right blend of high-quality and higher-risk bonds.

5. Do not play follow the leader

Chic sectors in an economy will always exist. However, it is important to not be overly concerned about performance, as sectors can move up and down, from year-to-year. Thus, it is advisable to select a fund with low risk as your base holding. Then you should create satellite funds based on that base holding.