Low interest rates and the Bank of England's 'Funding for Lending' scheme have pushed the rates on offer down even further this year, raising the question of whether it is worth holding the accounts at all.
The best rate available is 2.5 per cent, according to Moneyfacts, which would provide a total return of 7.7 per cent over three years.
This is less than the worst returns made by a fund in the most defensive multi-asset sector over the past three years, according to data from FE Analytics.
That fund, the £46.2m City Financial Diversified, has made 8.74 per cent, while the next best fund in the IMA Mixed Investment 0%-35% Shares sector, Fidelity Multi Asset Defensive, has made 10.05 per cent.
While no three-year period is alike, meaning that future returns could be very different, the figures suggest that even taking a minimal amount of risk could give investors a significantly better return.
IMA Mixed Investment 0%-35% Shares is the most defensive of the mixed asset sectors, which are popular with investors looking for diversified exposure through a single fund.
Managers seek to provide low-risk returns by holding small amounts of shares along with more stable investments such as bonds.
The returns of the City Financial and Fidelity funds are the worst that an investor could have received in the sector, but the sector average over this time is 16.38 per cent, more than twice the prospective return on a cash ISA.
The highest returns came from Henderson Multi-Manager Diversified, which has made 30.01 per cent over the three years.
Performance of fund vs sector over 3yrs
Source: FE Analytics
For investors who were prepared to take just a bit more risk and invest in the IMA Mixed Investment 20%-60% Shares sector, the picture was more mixed.
Nine of the 201 funds – 4.5 per cent – failed to beat the 7.7 per cent on offer from the ISA, while two lost money – JPM Cautious Total Return and Barmac The Castleton Growth.
That means 95.5 per cent of the funds in the sector managed to achieve a return of over 7.7 per cent in this time.
The best returns were achieved by the Kames Ethical Cautious Managed fund, which made 38.66 per cent, while the sector average was 17.77 per cent.
In the IMA Mixed Investment 40%-85% Shares sector, every single fund made more than 7.7 per cent, with the worst returns being those of the JPM Balanced Total Return fund, which made 8.08 per cent.
The Consistent Practical fund recorded the highest returns, having made 44.23 per cent, while the average returns in the sector were almost three times the rate on offer on a cash ISA – 20.71 per cent.
Performance of mixed-asset sectors over 3yrs
| Investment | 3yr returns (%) |
|---|---|
| UT Mixed Investment 40%-85% Shares Retail | 20.71 |
| UT Mixed Investment 20%-60% Shares Retail | 17.77 |
| UT Mixed Investment 0%-35% Shares Retail | 16.38 |
| Best Cash ISA [prospective] | 7.7 |
Source: FE Analytics
However, FE Analytics figures suggest that investors thinking of putting their money in an absolute return fund should consider whether a cash ISA can do the same job.
Absolute return funds aim to provide a positive return in all market conditions, appealing to cautious investors who fear losing their money. Of the 35 funds in the sector with a track record that long, 12 failed to return 7.7 per cent to investors. Four lost money.
Danny Cox (pictured), head of advice at Hargreaves Lansdown, says that cash ISAs still suit those who need quick access to their money and expect to use it within a year or two.
"I think they still suit some people," he said. "If you look at last year’s figures, of the 15 million people who put money into an ISA, 11 million put money into a cash ISA."
"Cash is producing very low returns, lower than inflation in fact; even with a tax-free ISA you are losing a real amount."
"But it’s important to hold cash as an emergency fund and for your short-term spending needs. If you are investing for more than a few years, you should put your money in the market."
Some products offer investors a higher rate if they agree to tie up their money for a fixed period of years.
Investors can get 3 per cent on such a product this year if they lock their money in for three years, but Cox suggests that anyone with that sort of time horizon should be looking to funds.
"If you are losing your liquidity for half a percentage point I do not see the point," he said. "People should keep their money as liquid as possible."
An annual return of 3 per cent over the next three years would result in a gain of 9.3 per cent over that time, and Cox says that this is too little to tie money up for such a long time.
FE Analytics data shows that 99 per cent of the funds in the Mixed Investment 20%-60% Shares sector beat this figure, 92 per cent of the funds in the Mixed Investment 40%-85% Shares Sector and 95 per cent of those in the least aggressive sector.