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How you can invest £25 per month

I’ve seen many articles suggesting Cash ISAs and cash-saving accounts may not be the best place for your money.

And I agree with that advice because the interest rates savings accounts pay have fallen so low that even when you compound the interest, your savings will probably fall behind inflation.

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In other words, the spending power of your saved money will likely decline over time – by saving in a cash account, you could end up making yourself poorer!

Regular investing

I’ve also seen many articles suggesting one of the best places to put your money is in a Stocks and Shares ISA. And I agree with that too. But how can you invest in shares if you have, say, £25 each month to put away? Read on, and I’ll tell you how you can do it…

I don’t think it makes sense to invest in the shares of individual companies unless you have about £2,000 to put in. The transaction fees will cost too much relative to a smaller amount of money and put you behind from the start.

I reckon the best solution for investing smaller amounts of money is to go for a collective investment vehicle, such as a share fund, which will automatically spread your money over the many underlying investments in the fund. And without excessive transaction costs.

The great news is that, often, funds will allow you to make a minimum regular investment of just £25. I had a quick look at one provider’s website – Hargreaves Lansdown – and discovered many funds to choose between. The first thing to decide is whether to go for a managed fund or a passive fund?

Managed funds are run by a fund manager or a team of investment professionals who pick, buy, manage and sell the investments in the fund. The idea is that their knowledge and skill will help the fund outperform its benchmark, which could be something like the FTSE 100 index, or the FTSE All Share index, for example.  Examples of managed funds include the Fundsmith Equity and LF Lindsell Train UK Equity.

Accumulation and compounding

Another approach worth considering is to go for a low-cost, passive index tracker fund that mechanically aims to replicate an index, such as the Vanguard FTSE 100 indexUBS S&P 500 Index, and HSBC FTSE 250 index, or any one of the many other tracker funds you could choose between.

I’d go for the Accumulation version of the fund you select instead of the Income version so that the dividends are automatically rolled back in to help you compound your investment. Then I’d aim to increase my regular payments into my investments whenever I could, at least aiming to increase the amount once a year – the more you invest, the more your investment pot can compound over time.

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Kevin Godbold has no position in any share mentioned. The Motley Fool UK has recommended Hargreaves Lansdown. 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.