Fund ideas for investors of all persuasions

Kyle Caldwell’s five-part video series explains the nuts and bolts of active funds, investment trusts, index funds, ETFs and investing for children. 

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How to own the world through index funds and ETFs

Generally speaking, it is a good idea to have some exposure to lots of different markets to access the best companies. This gives you diversification, one of the golden rules of investing to spread risk far and wide. 

An easy way to ensure you have most bases covered around the world is to opt for a globally diversified fund. These funds can act as useful core holdings in a portfolio. 

Investing in tracker funds, called index funds or exchange-traded funds (ETFs) is a simple, but effective way, of investing in the world’s biggest businesses. Tracker funds and ETFs, also called passive funds, follow the up and down fortunes of a particular stock market index. In most cases passive funds are low cost – with some global tracker funds and ETFs costing as little as 0.12% a year, which is £12 on a £10,000 investment.  

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Five of the lowest-cost options are SPDR MSCI World ETF (LSE:SWRD),  iShares Core MSCI World ETF USD Acc GBP (LSE:SWDA), Amundi MSCI World ETF Dist GBP (LSE:WLDL), Vanguard FTSE Developed World ETF $Dis GBP (LSE:VEVE) and Fidelity Index World. Each passive fund owns over 1,000 global companies listed on developed markets.  

For those who want their global exposure to also include emerging markets, the funds can be slightly more expensive. Options include HSBC FTSE All-World Index, iShares MSCI All Country World ETF and the Vanguard FTSE All-World UCITS ETF GBP (LSE:VWRL).  

Why these are the most popular active funds

Over the past decade, index funds and ETFs have been selling like hot cakes, with more investors opting for the simpler approach of gaining exposure to how a particular stock market or bond market performs.  

This is instead of attempting to beat it through selecting an active fund manager. Although, of course, there are no guarantees the fund manager will beat the index.  

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At interactive investor, over the past couple of years we have seen high demand for global and US funds that track the up and down fortunes of the stock market. These are known as passive funds.  

In terms of active funds, there are five that feature in our top 10 most-bought funds and investment trusts over the past year. Let's briefly run through them.   

Royal London Short Term Money Market

It owns a diversified basket of safe bonds that are due to mature soon, normally within a couple of months, meaning that investors can earn an income on their cash with minimal risk. It has yield of close to 5%, and is competitively priced with a yearly ongoing charge of 0.10%. 

Scottish Mortgage Ord (LSE:SMT)

This investment trust invests in disruptive growth companies listed on the stock market and has around a quarter of the portfolio in private companies, which retail investors cannot buy themselves. Its top three holdings are Elon Musk’s SpaceX, Amazon.com Inc (NASDAQ:AMZN), and Latin American e-commerce giant MercadoLibre Inc (NASDAQ:MELI).  

Jupiter India

This fund offers exposure to a fast-growing economy that has favourable demographics, including a young population. India’s stock market has enjoyed a good spell of performance over the past couple of years, and investors buying today will be hoping the purple patch continues. Its fund manager, Avinash Vazirani, has a long tenure, having been in charge of the fund since 2008.  

Greencoat UK Wind (LSE:UKW)

This investment trust, which as the name suggests invests in UK wind farms, aims to provide investors with a yearly dividend that increases in line with RPI inflation. This has been successfully achieved each year since the trust launched in 2013. This track record, and its high yield, currently 8.7% (at time of recording), have been attracting investors.  

Fundsmith Equity

This fund is managed by Terry Smith, whose strong long-term returns have earned him the accolade of star fund manager. Smith focuses on “high-quality” companies. That means firms with established businesses, reliable profits and steady growth. Smith says that his investment philosophy is to “buy good companies” and then “do nothing”. It is a concentrated portfolio, currently with 26 holdings.  

How to use investment trusts in your ISA

Investment trusts have certain bells and whistles that private investors can use to their advantage.  

Before I explain three of those quirks, let’s first take a step back and explain how investment trusts work.   

Investment trusts, like funds, invest in a “basket” of underlying assets, such as shares. But investment trusts differ in that they are companies listed on the London Stock Exchange. 

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Essentially, there are two “layers” of activity: how much the trust’s underlying investments are worth (the net asset value, or NAV) and its share price. 

Opportunity to buy on a discount

When the share price is lower than the NAV per share, this is known as a “discount”. When the share price rises above NAV, it’s trading at a “premium”, as you’re paying more than the assets are worth. 

If an investment trust is in high demand, perhaps due to strong performance, it will trade on a premium. Conversely, investment trusts that are out of favour will trade on a discount.  

Therefore, when an investment trust trades on a discount there is the potential to pick-up a bargain if that discount falls. For me, it is a case of taking a view on whether the prospects for the trust will improve, which could then lower the discount. 

Dividend payouts

Income-paying investment trusts have a particular attraction for investors who want a regular cash flow, because – unlike funds – they don’t have to distribute all the income generated by their assets every year. 

They can hold back up to 15% each year, which means they can build up a reserve to bolster dividend payouts in leaner years. While there are no guarantees the dividends will keep flowing, there are 20 investment trusts that have increased their dividends for more than 20 years.  

Gearing

Investment trusts are allowed to gear, or borrow, to invest. This can improve their performance, but it means they tend to be more volatile than funds.  

Gearing in a rising market magnifies gains for each shareholder; but if the market falls, investors in a geared trust will suffer greater losses per share. 

If you are feeling particularly confident about the outlook for an investment trust that gears and it performs well then you could see returns boosted over the long term.  

How a Junior ISA works and the types of funds to consider

A Junior ISA is a great way to save for children or grandchildren without the worry of tax eating away at their returns. Under the current rules, up to £9,000 can be invested each tax year.  

A Junior ISA can be opened by a parent or a legal guardian. However, in terms of paying into the Junior ISA anyone can pay into it – such as grandparents. When the child turns 18, they can then access the money. 

Many parents, however, make the mistake of playing it too safe by opting for a Cash Junior ISA, over a stocks and shares Junior ISA. The latest figures show that in the 2022-23 tax year, £1.5 billion was subscribed to Junior ISAs, around 42.2% of which was in cash. 

Given the long-term time scale involved, investing the money rather than opting for cash is a no-brainer. A period of up to 18 years gives a very good chance of riding out short-term ups and downs that are come with the territory of investing. While cash is safer than investing, inflation erodes its real value over time. 

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And also remember that it is not an either/or decision – you can have both a cash Junior ISA and a stocks and shares Junior ISA.  

In terms of the types of funds to size up, parents could look to give their child exposure to the world’s biggest businesses through a global index fund or ETF. Among the options are SPDR MSCI World ETF, Fidelity Index World and iShares Core MSCI World ETF. These funds invest in over 1,000 companies, which spreads risk far and wide, and provides diversification.   

An up to 18-year time period also provides the opportunity to consider adventurous funds, which are more volatile over short time periods, but offer the prospect of higher rewards than lower-risk funds over the long term.

Examples of adventurous funds in interactive investor’s Super 60 investment ideas’ list include Scottish Mortgage, Fidelity China Special Situations (LSE:FCSS) and GS India Equity. Funds investing in emerging markets, Asia Pacific, or smaller companies, are also considered adventurous funds.  

Three hassle-free ways to invest your ISA

Many of us simply haven’t got the time, personal interest or know-how to manage our own portfolios. Instead, the preference is to hand the decision-making over to the professionals.  

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Below are some options for those looking to take a back seat. 

Multi-asset funds that track the market  

These funds invest in a spread of assets by using index trackers and ETFs, which aim to mirror the performance of a particular stock market or bond market.  

The funds have different risk levels. Basically, the more stock market exposure, the higher risk the fund.  

These fund ranges include Vanguard LifeStrategy, BlackRock MyMap, Legal & General Investment Management’s Multi-Index funds and abrdn’s MyFolio Index range. 

Global funds with plenty of diversification 

Global funds that have plenty of diversification are deemed long-term holdings that investors can tuck away with confidence.  

Among the candidates are global index funds or ETFs, or actively managed global funds, such as such as F&C Investment Trust Ord (LSE:FCIT) and Alliance Witan Ord (LSE:ALW). The duo own hundreds of global shares across various industries and sectors, which spreads risk far and wide  

interactive investor’s Managed ISA 

This option aims to keep things very simple, using index funds and ETFs to create two low-cost multi-asset portfolio ranges that will suit different tolerances of risk.  

Once you’ve answered a few questions, you will be match to one of the 10 portfolios. The one selected will be based on your risk level and whether or not you want to invest sustainably.  

The other options we’ve run through you will need to select your own investments. In contrast, our Managed ISA does this for you.