Despite individual stocks still heavily outweighing funds in the average stocks and shares ISA by 89% to 11%, funds have increased in popularity by 450% since 2008.

Just five years ago, the average stocks and shares ISA portfolio comprised of a 98% equities to 2% funds split, according to a report by stockbroker, The Share Centre.

The number of trades made during ISA season has also increased since 2008, with the average investor already completing six trades this current tax year.

This is a 100% increase on the three trades made on average five years ago and suggests investors are now drip feeding sums into their stocks and shares ISA, rather than transferring large amounts in one trade.

The research also shows younger investors (18 -24 years old) are more likely to invest their ISA portfolio in funds (74% to 26%) than older investors, less likely to trade (five trades), and more likely to have a lower value of trades (£1200.41).

Meanwhile, older investors potentially approaching retirement (55 plus) hold a 90%-10% split between equities and funds, and make six trades with an average value of £2192.86.

Men are more active traders than women, with seven trades so far this year, in comparison to women’s six. Women are also more likely to have a higher value of trades than men, this year making trades worth £2159.10, £55 more than men who have made £2104.54.

Despite the number of trades increasing overall, ISA investors are still missing out on making the most of their tax efficient investment portfolio.

All adults in the UK can invest up to £11,280 this tax year into a stocks and shares ISA, and today’s research shows that many investors are not taking advantage of this opportunity.

On average, investors this season so far are using just over half (59%) of their average ISA allocation, approximately £6655. Older investors (55 years plus) are seemingly wisest to the benefits of using an ISA and are already using 69% of this season’s allocation – approximately £7783 – while younger investors (18-24 years old) are missing out by only utilising £4512 (40%) of theirs.

Andy Parsons, head of investment research at The Share Centre, said: “It is vital investors take advantage of their ISA allowance and protect what they can from the taxman. Cash ISA rates remain unattractive as when compared to the current rate of inflation investor’s purchasing power is likely to be negative. For those prepared to accept a higher degree of risk, the rewards of a stocks and shares ISA are potentially more fruitful.

“While volatile markets may have left some wary of investing, it is worth bearing in mind that over the longer term returns from equity backed investments have consistently outperformed cash.”

To reflect the growing interest in investing in funds, Andy Parsons reveals his top ISA fund picks for the 2012/2013 season:

Standard Life UK Equity Income Unconstrained fund (lower risk)

“The Standard Life UK Equity Income Unconstrained fund differs from the traditional UK equity income fund as it looks outside the core UK blue chip income stocks and offers real portfolio diversification. Whilst there will be a number of familiar top holdings, just over 50% of the fund is from the mid cap arena. This flexibility ensures the portfolio does not merely follow the herd and this can be seen by the current top 10 holdings – which include Cineworld Group, Hiscox, Easyjet and Close Brothers.

“We believe the manager, Thomas Moore, is a rising star within the investment world and the portfolio has certainly benefitted since he took to the helm in January 2009. Over both three and one year on a cumulative basis, the fund is ranked first quartile and this strength has continued into 2013.”

BlackRock European Dynamic fund (medium risk)

“The BlackRock European Dynamic fund provides diversification that a portfolio based solely in UK companies cannot, for example Demark is a world leader in alternative energy solutions and Germany has world class engineering companies and car manufacturers.

“Compared to other developed markets, European companies are potentially more attractive due to the extent at which the woes of Europe have driven down company share valuations, as stocks have been marked down almost for association with the region. However, companies are now better financed than they were pre-crisis and many remain the strong global brands they were before. If the eurozone does show real signs of recovery in 2013 and beyond, these could perform really well.
“The funds sector preferences are Consumer Products, Financials, Industrials and Health Care.”

Invesco Perpetual Global Smaller Companies fund (higher risk)

“The Invesco Perpetual Global Smaller Companies fund is suitable for investors looking to diversify their portfolio through geographical representation as well as market cap size.

“This fund tends to have a large number of holdings, providing investors with the comfort that given the often volatile nature of such companies, risk and diversification is spread across not only a vast number of companies, but more importantly across geographical regions as well.

“The fund is managed on a team basis by Invesco Perpetual, with individuals responsible for identifying investment opportunities from within their geographical area of expertise. The fund is exposed to a significant number of different countries and the largest holding only accounts for 0.95% of the fund. The top four sectors are Financials Industrials, Consumer Discretionary and IT.”