Fund and trust ideas for the short, medium and long term

For beginner investors, it can be overwhelming deciding how and where to invest due to the huge amount of choice, with thousands of funds available in the UK.

To help narrow your focus and make decision-making easier, it’s important to put a plan in place. This includes thinking about investment goals and timescale. 

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Below we run through the types of funds, investment trusts, and exchange-traded funds (ETFs) for short, medium and long-term goals.

Short-term goals 

If you need to access your money within the next five years, sticking to cash is very sensible as stock markets can be unforgiving over the short term. Over the long term, history shows that stock markets recover from sharp declines and comfortably outpace cash returns. But a time horizon of at least five years, preferably longer, is required to give investments the best opportunity to ride out short-term volatility.

Due to where interest rates sit today, with the Bank of England base rate at 4%, investors can enjoy short-term returns that are slightly ahead of UK inflation, which stands at 3.8%, by using money market funds.

By investing in a money market fund, you are trusting a professional fund manager to generate a “cash-like” return on your behalf. Money market funds operate similarly to other funds, where money from multiple investors is pooled and put into a range of investments.  

The income that money market funds generate, although not guaranteed, tends to be close to the level of UK interest rates. This level of income, the fund’s yield, can be really competitive with what a savings account may pay.  

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Money market funds invest in the highest-quality secure bonds that are maturing soon, often in a couple of months, from financial institutions. The funds also make use of overnight deposit accounts and other short-term savings instruments offered by banks, known as money market instruments. 

On the risk spectrum, these funds are at the low-risk end, since they invest in high-quality bonds. Money market funds also have numerous holdings, which also reduces risk.  

In a nutshell, money market funds are designed to be low-risk straightforward products that behave in a cash-like manner. The funds provide a modest income inside a tax-friendly wrapper – stock & shares ISAs and SIPPs. They can also be held in a general investment account (GIA). 

Investors often use them to park cash balances for a short period while deciding where to invest, or to guard against periods of stock market volatility.

At present money market funds are offering yields of just over 4%. Examples of money market funds include: Royal London Short Term Money Market, L&G Cash Trust, Fidelity Cash, BlackRock Cash, Vanguard Sterlibg Short Term Money Markets, Premier Miton UK Money Market, Invesco Money UK No Trail, and abrdn Sterling Money Market.

However, bear in mind that as interest rates are going down rather than up, yields on money markets are also likely to drop.  

Other defensive fund choices to consider include multi-asset funds in the Mixed Investment 0-35% Shares and Mixed Investment 20-60% Shares sectors. As the names imply, funds in these sectors are restricted to owning up to 35% or 60% in shares, with the remainder in bonds.  

There are also a small number of wealth preservation investment trusts, which seek to protect capital when stock markets fall notably. Three trusts that have a strong track record in achieving this are Ruffer Investment Company (LSE:RICA), Capital Gearing (LSE:CGT), and Personal Assets (LSE:PNL). Each trust invests in a variety of defensive assets, including small weightings to gold, which is viewed as a safe haven in times of uncertainty.

Medium-term goals

Risk appetite is a personal decision as only you can decide what level of risk you can tolerate emotionally and relative to your financial circumstances and time horizon.

If you would like greater balance in a portfolio, look to own bonds alongside shares. Multi-asset funds invest in both, with options including Vanguard LifeStrategy, BlackRock MyMap, Legal & General Investment Management’s Multi-Index funds and Aberdeen’s MyFolio Index range. The funds have different risk levels. Basically, the more exposure to shares, the higher the risk of the fund.

Also explore interactive investor’s Managed ISA range, which uses index funds and ETFs in low-cost multi-asset portfolios to suit different risk tolerances.

However, there’s also the risk of being too cautious, particularly for those with lots of time on their side. Those who take too little risk may not achieve their long-term goals.

For a medium-term time frame of five to 10 years, global funds are worthy contenders. Due to their diversification in having a spread of companies across the world, such funds are core holdings that investors can tuck away.

It’s important to consider how funds invest. Index funds and ETFs aim to deliver the return of the global stock market by following its movements. Active funds, those overseen by a professional fund manager, pick a selection of shares they think are the cream of the crop in an attempt to outperform the index, although there are no guarantees that will happen.

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While both proponents of passive and active funds tend to be dogmatic, it’s important to remember that it’s not an either/or decision, as you can use both approaches.

You could choose an active fund that invests very differently from the global market, such as Fundsmith Equity or Dodge & Cox Worldwide Global Stock, and pair it with a global index fund or ETF, with options including Vanguard LifeStrategy 100% Equity, Fidelity Index World, or iShares Core MSCI World ETF (LSE:SWDA), which all invest in developed markets. For some emerging market exposure, options include HSBC FTSE All-World Index, and Vanguard FTSE All-World ETF (LSE:VWRL).

You could also look to investment trusts F&C Investment Trust Ord (LSE:FCIT) and Alliance Witan (LSE:ALW). They both own hundreds of global shares across various industries and sectors, which spreads risk.

One thing to remember is that global funds, particularly tracker funds, have a large weighting to US shares. For example, the MSCI World Index, which follows the ups and downs of 1,320 global stocks across 23 developed markets, holds 72% in US companies. Therefore, if you already have US exposure through US index funds, ETFs, or active funds, there’s the risk of doubling up.

Long-term goals

While global funds are core holdings, having smaller positions in satellite holdings investing in smaller companies, emerging markets, Asia-Pacific, and specialist themes, means you move further up the risk scale.

As a rule of thumb, having 70%-80% in core funds, and the remainder in satellite funds, helps to ensure you don’t have too much of your portfolio in adventurous areas that could all fall sharply at the same time. 

Those investing for the long term – 10 years or more – have much more time on their side to ride out the greater volatility associated with higher-risk or adventurous funds.

Emerging market and Asia-Pacific funds invest in faster-growing, but less economically mature, economies. This area of the globe has more youthful populations than the West and growing middle classes. Options in interactive investor’s Super 60 list of investment ideas are: iShares Pacific ex Japan Equity Index, Fidelity Asia, Guinness Asian Equity Income, Fidelity China Special Situations (LSE:FCSS), Fidelity Index Emerging Markets, JPMorgan Emerging Markets (LSE:JMG), and Utilico Emerging Markets (LSE:UEM).

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Smaller company-focused funds are also higher risk than funds investing in larger companies, but historically the returns of smaller companies have been higher. WS Amati UK Listed Smaller Companies is a Super 60 fund, as are Fidelity Special Values (LSE:FSV) and Diverse Income Trust (LSE:DIVI), but while the latter two have a bias to UK smaller companies, they invest across companies of all sizes.

Other options include funds targeting high long-term returns from specific sectors of the economy. There are numerous themes, but the main ones include artificial intelligence (AI), battery technology, cloud computing, clean energy, and demographical trends, such as the world’s ageing population.

Investing in technology shares is a well-established theme, with investment trust duo Polar Capital Technology Ord (LSE:PCT) and Allianz Technology Trust Ord (LSE:ATT) providing broad exposure.

Other funds focus on a sub-theme within the broader technology sector, such as Sanlam Global Artificial Intelligence, L&G Cyber Security ETF (LSE:ISPY), iShares Automation & Robotics ETF (LSE:RBTX), Pictet Robotics and First Trust Cloud Computing ETF (LSE:FSKY).

Another technology play, which is a much newer theme, are funds providing exposure to cryptocurrency-related companies such as VanEck Crypto & Blockchain Innovators ETF (LSE:DAGB) and Invesco CoinShares Global Blockchain ETF (LSE:BCHS). 

Other examples of funds investing in themes, some of which are niche, include: Pictet Water, Regnan Sustainable Water and Waste, iShares Global Clean Energy Transition ETF (LSE:INRG), Guinness Sustainable Energy, Pictet Clean Energy Transition, EMQQ Emerging Markets Internet ETF (LSE:EMQP), Morgan Stanley Global Brands Equity Income fund, VanEck Video Gaming & eSports ETF (LSE:ESGB), iShares Healthcare Innovation ETF (LSE:DRDR) and Sarasin Food & Agriculture Opportunities.

For more detail, read our guide on what you need to know about investing in themes.