investment
basic guide to Stocks and Shares ISAs part 5: all about funds
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For a while now, I’ve had a trickle of requests for a basic guide to investing in UK Stocks and Shares ISAs.
As I want to go through things carefully, I’ve split all the details into several different parts, starting with thinking about yourself and what you want with the money, and moving into what there is available, and the nuts and bolts of products and investments. This is part 5 of the basic guide to Stocks and Shares ISAs.
Previously on the basic guide to Stocks and Shares ISAs:
- introduction – what is the basic guide to Stocks and Shares ISAs about
- part 1: all about you – why you want to invest, and how much money you have to play with
- part 2: all about risk – successful investing means always being able to sleep at night
- part 3: all about investments – what types of investments that you can put into ISAs
- part 4: all about asset allocation – how to decide which mix of investments is right for your ISA
where are we up to?
So, by now you should have a basic idea of what you want to invest in, and are aware that you might need to tweak it based on the amount of money that you have to play with. We started looking at what is wanted in general before delving into the specifics because I find investment fund websites incredibly difficult to navigate. Funds tend to be named the same sorts of things, and there’s either no choice at all, or far too much choice. It’s easier to start looking at them when you know basically what you want.
choosing investments
Now you should have your desired asset allocation in 5 main groups. As I mentioned before, the cash component should be held separately to your actual Stocks and Shares ISA as you can get better rates elsewhere. Within each asset class, you want to be diversified to reduce the risk that any one thing will be done badly. For the purposes of this, I’ll assume that you don’t want to hold individual shares in your ISA but you want to pool your money with other people in a collective investment like a OEIC, unit trust or similar (in the US, these are called mutual funds).
I’m a big fan of index funds because they are cheap, often beat managed funds, and I understand how they work, so I’ll be focussing on the relevant indexes. If you don’t want to invest in index funds, you should be aware of the major indices so that you have some sort of benchmark. I don’t know how you go about picking good actively managed funds - some resources that might help are:
equities - UK
The generic measure of everything in the UK is the FTSE All Share Index. It is well diversified in the UK and is weighted by market capitalisation (more money is invested in the things that are worth more). If you want to use an index tracker that covers essentially the whole of the UK market, without specialising in any one area, this is the tracker for you.
FTSE All Share trackers are pretty competitive - depending on the provider the cheapest is usually either the Fidelity Moneybuilder UK Index (0.1% fund charge, providers charges vary) or HSBC UK FTSE All Share Index Fund (0.25% fund charge, provider charges vary). In any case you should be paying well under 1% for a simple tracker.
Other useful UK indices that are used as benchmarks include:
- FTSE SmallCap - companies in the All Share Index, but not in the top 350
- FTSE 250 Index - mid-sized companies outside the top 100
- FTSE AIM Index - companies floating on the Alternative Investment Market, rather than the London Stock Exchange
equities - international
If you want to diversify abroad (and there’s certainly an argument that you should), the choice of index isn’t so clear. One of the problems is that, of course the UK makes up a proportion of the world economy, and you don’t want to be over-represented there.
Some potential indices to track include FTSE World ex-UK (cheapest example is usually Norwich International Index Tracking Fund at 0.9% depending on your provider), MSCI World (cheapest example is usually an ETF such as iShares MSCI World). You should be able to get a international fund for around 1% per annum.
equities - specialised
As you get more interested in investing, you might want to weight your portfolio towards a particular sector that you think is going to perform well compared to the rest of the economy, or focussing in your international investments into countries or regions that you think will grow compared to the UK.
More ‘interesting’ equity funds are outside the scope of this guide, but one of the pitfalls of this approach is that your funds may overlap and you may not have the asset allocation that you want. A useful research tool is the Morningstar Portfolio X-Ray, which shows you what your whole portfolio is actually invested in.
bonds and gilts - UK
Chances are that the bonds weighting in your asset allocation is lower than your equities weighting. This means that you’ve got less scope to diversify by investing in different bonds fund.
The main indexes that you might want to consider are the FTSE-A Index-Linked All Stocks Index, or FTSE-A Government Securities All Stocks Index (cheapest tracker funds are usually Legal and General) which are for different types of government bonds.
There are fewer bond index funds, so you may need to get an actively managed fund, in any case there should be one available with fees below 1%.
property
You can invest in property through a property trust. If there are few bond index funds, there are even fewer property ones, and if you want to go the index tracking route, your best bet is an ETF such as the iShares FTSE EPRA/NAREIT UK Pty . Otherwise, actively managed property funds are available - you can use the tools at Morningstar to find the various funds.
summary
Hopefully, I’ve given you some ideas of funds and indices that you might be interested in for your Stocks and Shares ISA covering the main sectors. If you find this a little daunting, remember that you don’t need to do it perfectly to make a good start on your ISA investment, and starting is much more important than anything else.
still to come…
Coming up in the basic guide to Stocks and Shares ISAs:
- part 6: all about providers – getting the best deal for the money
- conclusions – what’s been covered, and what to do next
Similar Posts:
- basic guide to Stocks and Shares ISAs part 4: all about allocation
- basic guide to Stocks and Shares ISAs part 3: all about investments
- basic guide to Stocks and Shares ISAs part 6: all about providers
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8 comments for “basic guide to Stocks and Shares ISAs part 5: all about funds”
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I think I will give fidelity ago next financial year… coming up soon.
One flexible solution you’ve not covered here is a Self Select ISA from a stockbroker.
You can put ETFs into it (like ISF, which tracks the FTSE) and have the same benefits as a cheap index tracking ISA elsewhere (arguably, even cheaper).
Once your fund has built up a bit (say 3-4 years in) you can sell a bit off and diversify it into another ETF, say the property one you mention, or maybe something overseas, or racy like BRIC, which tracks the 4 major emerging stock markets.
Anyway, congrats on a very comprehensive series!
@Monevator:
That’s an option I hadn’t really considered. Maybe it’s a bit out of the ordinary for a beginner to try out, but it’s certainly a reasonable strategy, just watch out for the fees on the Self Select ISA - no point in paying more if you don’t have to.
One thing I don’t quite get, and I’m hoping someone can help… (I’m looking to get my first stocks and shares ISA)
You advise (and you’re clearly not the only one) to go for an index tracker of some sort.
Since June last year, most if not all UK indexes (FTSE, AIM, etc.) have gone down significantly, sometimes up to 30%, and currently don’t show any sign of recovering.
Does that not mean that anyone who’d have gone for this sort of equity tracker fund has lost big time, and therefore it isn’t really the best thing to go for at this stage?
Thanks for any comment
All investments are meant to be held for the long term, so it doesn’t matter an index fund goes down in value over a few months, it’s only important that it goes up in value over the long term.
The majority of actively managed funds do not beat index trackers, and I don’t think it’s straight-forward to pick one that will out-perform an index tracker over say 10 years (a good investment timescale). Therefore, I use index trackers.
When you’re thinking about investing for the long haul, it’s important to ignore the noise of the stockmarket and focus on the underlying trends. Things like how well a stock has done in the last few days/weeks/months is the province of the traders. Trading is not something that I would suggest for most investors.