How to choose between our six starter funds

Building your own portfolio takes time and effort, which can be a bit daunting for some first-time investors. However, for those who would prefer a more hands-off approach, there are shortcut options in the form of 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 beginners due to the diversification offered by the spread of investments.

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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 give your money ample opportunity to grow, while guarding against severe short-term losses.

One trouble investors face is a huge amount of choice, with hundreds of multi-asset funds to pick from.

To stop beginner investors getting bogged down, interactive investor has chosen six Quick-start Funds that we believe stand out from the crowd.

- Vanguard LifeStrategy® 20% Equity Fund 

- Vanguard LifeStrategy® 60% Equity Fund

- Vanguard LifeStrategy® 80% Equity Fund 

- Royal London Sustainable Managed Growth

- Royal London Sustainable Diversified

- Royal London Sustainable World

Active or passive? 

The first thing to explain is that out of our six Quick-start Funds, three are actively managed (by Royal London) and three invest passively (the Vanguard funds).

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 generally much lower than active fund fees. 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 (OCF) of between 0.75% to 1%.

With multi-asset funds, it’s no different – actively managed multi-asset funds, in most cases, cost more than passively managed multi-asset funds.

We think that our three Quick-start actively managed Royal London (RL) funds are well priced given the expertise of management and active approach, with yearly ongoing charges from 0.67% to 0.77%.

The three Quick-start passively managed Vanguard funds cost less, with an OCF of 0.22%.

The Royal London range has a focus on sustainable investing, which it achieves through positive screening, and by applying additional exclusions to certain industries.

The funds look to invest in companies that are delivering some positive societal or environmental benefit through their products or services. Investors who wish to align their own personal values with their investments may find these funds suit them.

The Vanguard funds, however, simply track various stock-market indices and do not pick and choose between stocks 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 investment fund, a choice will need to be made.

Beginner investors have to decide whether they are happy to pay for active management, or whether they would prefer to 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 conservative, meaning that when stock markets fall the fund is better equipped to protect your capital. The trade-off, however, is that when markets rise, funds that are more cautiously positioned will generate more modest returns.

Funds that are more conservatively invested will have a lower exposure to shares. In our Quick-start Funds range, this conservative approach applies to Vanguard LifeStrategy 20% Equity and Royal London Sustainable Managed Growth.

Vanguard LifeStrategy 20% Equity provides 20% exposure to global shares and 80% exposure to global bonds. Royal London Sustainable Managed Growth holds 25% in equities and 75% in bonds, albeit the fixed-income portion allocates much more heavily to the UK than the Vanguard equivalent.

The Royal London Sustainable Managed Growth fund can allocate from 0% up to 35% to equities but, as is the case across the range, tends to vary the equity/fixed income allocation a minimal amount.

The next step up in terms of risk level are funds adopting a medium-risk approach. In the Quick-start range, Vanguard LifeStrategy 60% Equity and Royal London Sustainable Diversified Trust fit the bill.

Such funds occupy the middle ground between those that are more cautiously and adventurously positioned. So, 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.

Both Vanguard Life Strategy 60% Equity and Royal London Sustainable Diversified Trust provide 60% exposure to global equities and 40% exposure to global bonds.

Royal London’s upper limit for equity exposure is 60%, and it typically keeps close to this level. At least 80% of the bond allocation must be held in investment-grade sterling (or sterling-hedged) corporate bonds.

The two most adventurously positioned funds in our Quick-start Funds range are Vanguard LifeStrategy 80% Equity and Royal London Sustainable World. Both funds invest in a manner designed to produce higher returns than the others discussed, but they protect capital less when markets fall.

Vanguard Life Strategy 80% Equity provides 80% exposure to global equities and 20% exposure to global bonds. For Royal London Sustainable World, the ratio is currently 85% equities and 15% global bonds. The level is typically at or just below 85% equity. The upper equity limit for the Royal London Sustainable World fund is 85%, and at least 80% of the bond allocation must be held in investment-grade sterling (or sterling-hedged) corporate bonds.

Before investing, it is advisable to 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 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 period when investing in funds.

Regular investing reduces risk

Regular investing does away with the risk that you might put a lump sum into the stock market just before a nasty dip.

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 have chosen.

Because your contributions are invested in 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 benefit from “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 money into the market over time rather than by investing a single lump sum at the beginning of the period. And more fund units means greater growth potential.

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.