Personal Equity Plans: Drip-feed it or lump it

INVESTORS can put up to pounds 6,000 into a general PEP in the 1997/98 tax year, which ends next month. But you don't have to invest anything like that amount: you can drip-feed cash into unit and investment trust PEPs through regular savings plans rather than subscribe one large lump sum.

Most managed PEP providers offer regular savings schemes that let you invest from as little as pounds 20 a month. Emma Weiss of unit trust trade body Autif says: "It's an easy option - set up a direct debit and let your money build up slowly."

Clearly, some investors have to use regular savings plans. Not everyone has significant lump sums to transfer into a PEP. In any case, there are sound investment reasons for a regular savings scheme.

For one thing, even relatively small monthly investments soon mount up to large funds. Statistics from performance analyst HSW show that pounds 50 a month put into an average UK equity income unit trust for the last five years would now have built up to a fund of around pounds 4,500. And you can still make one-off top-up contributions.

Moreover, most regular savings schemes are pretty flexible: you can usually change the amount you invest each month. You can even suspend payments for a while. Most managers will reinvest your dividend income in your PEP, boosting returns. And if you pick a PEP provider that runs several unit or investment trusts, you may be able to switch between them cheaply.

Regular savings schemes offer a neat trick known as pound cost averaging. This helps smooth out the peaks and troughs of stock market investment. Lump-sum investors, on the other hand, are at the mercy of the markets: if you put several thousand pounds into your PEP on the wrong day - the day it collapses - it may be years before your fund recovers.

In pound cost averaging, when the price of your unit or investment trust falls, you'll get more units or shares for your investment. Instead of staking everything on timing it right, you invest 12 times a year, reducing the effect of volatility.

Volatility is a vital consideration. Over time, investments in shares tend to outperform most other investments. But on a monthly basis, shares are much more volatile. Regular savings flatten this volatility. This is not to say that regular savings will always do better: if you time it right, your lump sum will do better. Performance analysts HSW and Micropal publish volatility figures for most trusts.

The key, however, is to invest for the longer term - five years or more. Jonathan Fry, of Guildford-based Premier Investment Management, says: "Discipline is all important. Don't pull out if the market falls: that's the point of pound cost averaging."

q Contacts: Association of Unit Trusts and Investment Funds, 0171-831 0898; Association of Investment Trust Companies, 0171-282 5555; HSW, 01625 511311; Micropal, 0171-741 4100; Premier Investment Management, 01483 306090.

q David Prosser is features editor of `Investors Chronicle'.