We have selected six quick-start funds for beginner investors that we believe stand out from the crowd. Kyle Caldwell runs through the active and passive options.
Building your own portfolio takes time and effort, which can prove a bit daunting for some first-time investors. There are, however, shortcut options for those who would prefer a more hands-off approach: multi-asset funds.
This type of fund makes the investment decisions on your behalf – splitting your money across a mix of different assets, but mainly shares and bonds.
Such funds are a one-stop shop to the world’s markets and are viewed as an ideal starting point for beginner investors due to the diversification provided by the spread of investments. The theory is that different types of investments are unlikely to all outperform or underperform at the same time, which reduces the volatility of your overall portfolio. Therefore, multi-asset funds provide money invested ample opportunity to grow, while at the same time guarding against severe short-term losses.
The trouble investors face is the huge amount of choice, with hundreds of multi-asset funds to pick from. To stop beginner investors getting bogged down, interactive investor’s experts (the ii investment selection committee) have selected six quick-start funds that we believe stand out from the crowd.
Active or passive?
The first thing to run through is that out of our six quick-start funds, three adopt an actively managed approach (those managed by BMO) and three invest passively (Vanguard).
In a nutshell, an actively managed fund is run by a professional investor who attempts to outperform a stock-market index and therefore deliver better performance. However, there are no guarantees the fund manager will outperform.
A passively managed fund, however, aims to simply replicate the performance of a stock-market index. Therefore, those who select a passive fund will receive index-like returns (minus fees) and investments will rise and fall in line with how the index performs.
Passive fund charges are, on the whole, much lower than active funds. For investors seeking exposure to the UK market, for example, passive funds are available at less than 0.1% (that means for every £1,000 you invest, less than £1 goes on management costs each year), whereas an actively managed UK fund will typically have an ongoing charges figure of between 0.75% to 1%.
In the case of multi-asset funds, the story is no different – actively managed multi-asset funds in most cases cost more than passively managed multi-asset funds.
Our three quick-start actively managed BMO funds are very competitively priced compared to competitors, with an ongoing charge figure of 0.35%. It is not uncommon for other actively managed multi-asset funds to cost close to 1% or, in some cases, higher than that.
The three quick-start passively managed Vanguard funds cost less, with an ongoing charges figure of 0.22%.
One key difference with the BMO range versus most other actively managed multi-asset funds is that its focus is on responsible investing by avoiding damaging or unsustainable practices. The fund focuses on companies making a positive difference to the world we live in. If you would like to invest in businesses “doing good” one of these three funds may fit the bill.
The Vanguard funds, however, simply track the composition of various stock-market indices and so do not pick and choose between what should or should not be invested in on ethical grounds.
There are pros and cons to both the active and the passive approach. Many investors view the two styles as complementary and invest in both, but for those selecting their first fund, a choice will need to be made.
Beginner investors ultimately need to decide whether they are happy to pay for active management, or if they would prefer to simply accept the returns of the index provided by passive funds.
How much risk are you willing to take?
Our six quick-start funds invest differently. Some are more conservatively invested, meaning that when stock markets fall the fund is better equipped to protect your capital. The trade-off, however, is that when stock markets rise, funds that are more cautiously positioned will produce more modest returns.
Funds that are more conservatively invested will have a lower exposure to shares. Out of our quick-start funds this applies to Vanguard LifeStrategy® 20% Equity Fund and BMO Sustainable Universal MAP Cautious.
Vanguard LifeStrategy® 20% Equity Fund provides 20% exposure to global shares and 80% exposure to global bonds, while BMO Sustainable Universal MAP Cautious can hold as little as 20% and as much as 60% in shares. But, typically, for this BMO fund the exposure to shares will be in the range of 30% to 50%.
The next step up in terms of risk level are funds that adopt a medium-risk approach, and for this both Vanguard LifeStrategy® 60% Equity Fund and BMO Sustainable Universal MAP Balanced fit the bill.
Such funds sit in the middle ground between those more cautiously and adventurously positioned. Therefore, when markets rise the funds are positioned to outperform the cautious fund in their respective fund range, but not the adventurous. When markets fall, the medium-risk fund is designed to limit losses more than the adventurous fund, but not protect capital as much as the cautious fund.
The Vanguard Life Strategy 60% Equity Fund provides 60% exposure to global equities and 40% exposure to global bonds, while BMO Sustainable Universal MAP Balanced fund can hold as little as 30% and as much as 70% in equities. This BMO fund will typically have an exposure to shares in the range of 40% to 60%.
Last but not least are the two most adventurously positioned funds out of our quick-start range: Vanguard LifeStrategy® 80% Equity Fund and BMO Sustainable Universal MAP Growth. Both funds invest in a manner designed to produce higher returns than the others that we have discussed, but they protect capital less when markets fall.
The Vanguard Life Strategy 80% Equity Fund provides 80% exposure to global equities and 20% exposure to global bonds, while BMO Sustainable Universal MAP Growth can hold as little as 40% and as much as 80% in equities, but will typically have an exposure to shares in the range of 50% to 70%.
Before investing, decide what you want to achieve, how long you are planning to invest for, and how much risk you are prepared to take. You must also understand your tolerance to risk rather than appetite for reward. Every investor must consider the potential downsides before getting started.
As a rule of thumb, five years is considered the minimum time period when investing in funds.
Regular investing reduces risk
Regular investing does away with the risk that you might put your whole lump sum into the market just before a nasty dip in the stock market.
It has other advantages too. Importantly, once the plan is set up to invest, say, at the start of each month, you don’t have to think any more about it except to check from time to time that you are still happy with the quick-start fund that you are investing in.
Additionally, because contributions go into the stock market regardless of exuberance (when shares will be expensive) or mayhem (when they will be cheap), you are buying at a range of different prices. This means that you can benefit from an effect called pound-cost averaging, which means that when stock markets fall, your regular monthly payment buys more fund units, while when markets rise, fewer shares and units can be purchased with the same sum.
As a result, regular investors tend to end up with more fund units by drip-feeding over time rather than by investing a single lump sum at the beginning of the period. And more fund units means greater growth potential thereafter.
Quick-start funds are not personal recommendations, meaning we have not assessed your investing knowledge and experience, your financial situation or your investment objectives. You should ensure any investment decisions you make are suitable for your personal circumstances. Note that interactive investor does not endorse any particular product. If you are unsure about the suitability of a particular investment or think you need a personal recommendation, you should speak to a suitably qualified financial adviser. The value of your investments, and the income derived from them, may go down as well as up. You may not get back all the money that you invest.
Full performance can be found on the company or index summary page on the interactive investor website. Simply click on the company's or index name highlighted in the article
The costs are broken down in more detail in each fund’s cost disclosure document, which you can review before investing.