Getting your 10 per cent

As shares look shakier than ever, many people are opting for income-based Isas rather than equity growth funds - hoping the cushion of a regular pay-cheque will protect them against the worst share markets can throw at them. But chasing high returns can be as risky as investing in all out growth shares if you pick the wrong fund. We asked Liz Lyke, at IFA Options for Women; Roddy Kohn of Kohn Cougar; Graham Hooper of Holden Meehan and Saran Allott-Davey, Heron House Financial Management which funds they would choose:

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LL: "A safer option for investors who don't need income now, but do not want to go full-out for growth, is the Invesco Perpetual Income fund managed by Neil Woodford. Dividends are reinvested into the fund to provide capital growth."

RK: Collins Stewart Zero Dividend Recovery Fund (high risk): "It's a fund of zero dividend preference shares with good growth prospects."

GH: Gartmore Safeguard (lower risk). "This is a protected fund which means that if the stock market falls, you don't take the full brunt."

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LL: "If you are looking for low-risk, then you will have to accept that returns will be lower, too. I like the Merrill Lynch Government Securities Fund, which invests in gilts."

RK: Edinburgh Worldwide. "An investment trust trading on a 20% discount - you buy the assets at a bargain price."

GH: AXA Distributor. "This is a mix of bonds, equities and gilts in a tried-and-tested fund."

SA-D: Newton Income, which invests predominantly in UK equities and is currently yielding 2.3%.

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LL: "Property funds are a balanced investment risk, so they are unlikely to have the same severe ups and downs of equities. A year or two ago, the yield on this fund was around 7%. Now you have to be more realistic and accept a low income, but with a lower inherent risk."

RK: Perpetual Income and Growth. "If you don't need income immediately you can reinvest it, and this is a good quality, well-established investment trust."

GH: Credit Suisse Income. "This is currently yielding 4.5%. There is a risk to your capital if the stock market falls but Bill Mott, who runs the fund, has a very good track record."

SA-D: Framlington Blue Chip, which invests in large UK companies. "I believe that equity income funds offer better value in the present climate." Norwich Union has just brought out a property fund which can be held in an Isa. It aims to provide an income of around 4%.

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LL: DWS UK Equity Income Plus, which aims to achieve 130% of the FTSE All-Share yield.

RK: M&G High Yield Corporate Bond fund. "Good value at the moment."

GH: The more income you seek from a corporate bond fund, the greater the risk. "These funds would be adversely affected by rises in UK interest rates, which is something to bear in mind." He likes the Legal & General Fixed Interest fund.

SA-D: Liontrust First Income. "This is run by Jeremy Lang who has a slightly quirkly approach and goes for companies he thinks are incorrectly valued by the market."

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LL: "Funds which provide this level of income are doing so at a risk to your under-lying investment capital." For example, the Henderson European High Yield Bond is invested in European bonds, but the managers are not going for capital growth. They will buy bonds that provide high dividends.

RK: Chooses the same fund. "You get exposure to European firms, though there is a currency risk."

GH: NDF Higher Income & Growth. "If you really need this level of income you will have to accept a certain risk, but this fund does protect you from up to 40% falls in the index."

SA-D: Standard Life High income or the Norwich Union Preference Share Fund. "A halfway house between pure equities or pure corporate bonds."

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You need to be daring if you want to achieve this income where the rate of inflation is under 3% and the Bank of England base rate is 3.75 %.

RK: Invesco Perpetual Monthly Income Plus, which combines a 20% investment in UK equities with high-yielding but riskier corporate bonds. He says: "Though the corporate bonds are sub-investment grade, having shares in the fund means you have a better balance and there is less risk to your capital." It is also LL's choice.

GH: NDF Selector Income & Growth. "You can achieve this income, which is pretty aggressive, but you will have to take risks to your capital to do so."

SA-D: "You'd be better off setting aside a lump sum and drawing on that to provide income for two or three years, while continuing to invest elsewhere for capital growth."

Up, up ... and away

Dividend income shares are helping Glaswegian Fraser Gold with his hobby ... climbing mountains. "The money from my Isa investments is split two ways," says Fraser, 67, a retired university lecturer in education. "My wife and I spend about £50 of it a month on housekeeping to boost our pensions. But the rest goes on four or five mountaineering weekends a year - I'm in a climbing club." He has a monthly income Isa with Credit Suisse - bought, he says, "as a result of a Jobs & Money article". But he also has built up a portfolio of income-producing investment trusts. He has been investing for over a decade in Henderson High Income, an "old-fashioned" split capital trust which has largely avoided current split capital problems. And he has holdings in Bankers and City of London, also part of the Henderson stable, as well as Shires, and Glasgow Income from Glasgow Investment Managers.

"My capital values have gone down, but that's not a problem as I don't need to spend the cash. The important thing is, my income is holding up better than it would in the bank."