With signs of investor sentiment improving, the coming weeks are expected to see a spike in new investments into tax-efficient Individual Savings Accounts (ISAs) with each adult able to invest a maximum of £11,280 in to a Stocks & Shares ISA.

The key question facing many will be – “where to invest?”

According to Bestinvest, bond funds have been the most popular choice for many ISA investors in recent years.

However, they now hold only limited appeal as yields have dwindled and performance momentum for bonds will diminish materially this year.

Jason Holland of Bestinvest points to equities as a more attractive in both valuations and in many cases offer superior income yields, albeit with potential for greater capital volatility.

1. Threadneedle European Select. The relentless stream of bad news from Europe since Greece’s woes started hitting the headlines has left the region unloved by many investors, with companies almost indiscriminately de-rated even where their businesses are in reality globally diversified and not reliant on the Eurozone economy.

This has led to the biggest disparity in company valuations between European stocks and their US rivals in many years, providing investors with an attractive opportunity to buy quality businesses.

We like the Threadneedle European Select fund, managed by Dave Dudding, which focuses on core Europe and targets global brands such as brewer Anheuser-Inbev Busch, Kit Kat to coffee group Nestle and Unilever whose products include PG Tips, Persil and Marmite.

2. First State Global Emerging Market Leaders. The emerging markets offer investors the opportunity to tap into much higher growth rates than the developed world, underpinned by younger populations and rising affluence.

Yet over the last two years as western investors became risk averse due to concerns about the future of the Euro and the US fiscal cliff, they reduced exposure to higher risk markets which has resulted in emerging markets reaching some of their lowest valuations in a decade. This represents a buying opportunity.

3. GLG Japan Core Alpha Equity D H GBP (FX hedged share class). Japan has been comprehensively out of favour with investors since its extraordinary bull market of the 1980s came to an abrupt end. While there have been occasional false dawns, Japan has suffered from political gridlock, lack of reform and a strong currency which has undermined its international competitiveness.

Japanese companies, which include many global leaders in technology and manufacturing, are optically cheap on most measures, with companies trading below their book value.

So why invest now? A recent change in political direction has led to massive stimulus policies and aggressive weakening of the Yen. While this approach is not without risk, if successful it could result in fundamental reappraisal of Japan and propel its markets higher. We recommend using the currency hedged share class of GLG’s Japan Core Alpha fund.

The fund, managed by Stephen Harker, has a strong style bias towards large businesses which he believes are undervalued. We would expect this strategy to play out well if there is a sustained re-rating of Japanese equities.

4. Fidelity MoneyBuilder Dividend For most ISA investors, UK shares will be their main allocation to equities.

Although the outlook for the UK economy is far from inspiring, the good news is that such is London’s status as an international market, around 58% of revenues generated by FTSE 100 companies are derived outside of the UK and Europe. UK equities provide access to many world class businesses.

Companies have been distributing healthy dividends which are generally well covered by underlying earnings and pay-out ratios are still some way below their peak levels. This suggests there is still headroom for further increases.

Historically around half of the overall return from the UK equity market has come from dividends, so equity income funds hold appeal for both income seekers and those growth investors who are happy to reinvest their dividends and benefit from a compounding effect.

There are a number of equity income managers we rate highly but for those investors wanting a blue chip approach our favoured fund is Fidelity MoneyBuilder Dividend which under the tenure of Michael Clark has been one of the least volatile funds in the sector.

5. Liontrust Special Situations At a time when the outlook for economic growth is anaemic, we believe some of the best money making opportunities will come from investing in individual company “special situations”.

This fund, which invests across the market cap spectrum from large companies to minnows, targets businesses which have distinctive qualities, such as intellectual capital, which are difficult for competitors to replicate, enabling them to defend profit margins and grow market share.

One such example is Domino’s pizza which has captured 90% of the 8% annualised growth in the pizza delivery market over the last seven years due to its strong distribution network and online ordering system.

Investors are reminded that any final decision on which fund to invest in should reflect their attitude to risk and the time period of investment and a review of where existing investments already lie.