If you’re just starting out by investing in a Stocks and Shares ISA, there are few better places to begin than high-quality funds.
One of the most important things funds do is to diversify the stocks and shares you hold across a wide range of industries. This protects you against losses in any one sector and means your portfolio doesn’t get wiped out by one set of unexpected bad news.
You can buy all of the funds listed below directly in your Stocks and Shares ISA, which means any gains you make are tax free, saving you a whole heap of money over the long term.
What you want
Funds are a really low-cost way to start income investing because there is often no charge for buying or selling shares, and no ongoing performance fees.
There are usually two types or classes of shares in managed funds: accumulation uses any positive gains the fund makes to buy more shares in that fund, increasing your holdings over time, while income returns any profits direct to you, in the same way as a dividend works for individual shares.
One with everything
I think investing in a FTSE 100 index tracker fund takes a lot of the hassle out of stock picking.
A favourite among beginner value investors I think you’ll like is the iShares UK Dividend ETF, which paid a 7% dividend at last count. An ETF or Exchange Traded Fund is basically just lots of shares grouped together. This one invests in 50 UK companies in total with a skew towards high dividend-paying shares. Its top five holdings are housebuilder Persimmon, the real estate investment trust Hammerson, mining firm Evraz, and two large insurers: Aviva and Standard Life Aberdeen.
I’ve got shares in the Lindsell Train Global Equity Fund and it has been one of my best performers over the last 12 months. It’s also free to buy and hold. The fund is run by Mike Lindsell and Nick Train and focuses on “exceptional” companies with sustainable business models.
Its top five largest holdings are Unilever, Guinness owner Diageo, Heineken, the London Stock Exchange and skincare firm Shiseido.
Consumer staples make up 45% of the fund which makes it a great defensive long-term play: staples are things like food, drinks and household goods which people buy no matter how well or badly the economy is doing.
It’s not Terry’s, it’s mine
I’ve been a fan of fund manager Terry Smith for a long time because his investing mantra is simple and practical.
His top five holdings in the £19.4bn Fundsmith Equity Fund are Paypal, Microsoft, Estée Lauder, financial software firm Intuit and Stryker, a medical devices company.
Unlike other fund managers Terry promises no ‘shorting’, where a fund will bet against a share price to try to make very-short-term gains. The problem with shorting is that it’s a high-risk bet which, if it goes wrong, can lose a lot of money very quickly.
Terry follows the Warren Buffett school of value investing by focusing on buying high quality businesses at reasonable share prices, that don’t rely on lots of debt for their growth, and then holding them for the long term.
Tom owns shares in Lindsell Train Global Equity fund. Teresa Kersten, an employee of LinkedIn, a Microsoft subsidiary, is a member of The Motley Fool’s board of directors. The Motley Fool UK owns shares of and has recommended Intuit, Microsoft, PayPal Holdings, and Unilever. The Motley Fool UK has the following options: short October 2019 $97 calls on PayPal Holdings and long January 2021 $85 calls on Microsoft. The Motley Fool UK has recommended Diageo. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.