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What’s the best way to invest £5k in the UK?

If you’re lucky enough to have £5,000 to invest, you have plenty of options these days. Shares, investment funds, gold bullion, cryptocurrencies, and peer-to-peer (P2P) loans are just some of the assets you could invest in.

Personally, I believe that funds are your best bet for a £5k investment, assuming you’re investing for the long term. They’re less risky and more cost-effective (for a £5k investment) than investing in individual shares, more liquid and less hassle than physical gold, and more proven as a long-term wealth generator than cryptocurrencies and P2P.

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That said, if you’re thinking about investing £5k in funds, you’ll want to be strategic about your approach. A few simple moves could make a big difference to your wealth over time.

Invest in an ISA

The first thing I think you should do if you’re investing £5k is open a Stocks and Shares ISA with a reputable provider such as Hargreaves Lansdown, AJ Bell, or Interactive Investor. This type of investment account – which lets you contribute £20,000 per year – offers a number of advantages:

  • You’ll have access to hundreds of different funds

  • You can withdraw your money at any time

  • All your capital gains and income will be tax-free

It’s the last point, in particular, that’s important. By protecting your investment gains from the taxman, your money will grow a lot more over time.

If you’re aged between 18 and 40 and happy to lock your money away until you’re 60, you could also consider investing £4k of your £5k within a Lifetime ISA (the annual allowance here is £4k). Put £4k into this ISA, and the government will hand you £1k for free, giving you a total of £6k to invest.

Pick the best funds

Once you have an ISA open, the next thing I’d do is pick some high-quality funds that have excellent performance track records and are suited to your financial requirements and risk tolerance. I’d invest in a few different funds, in order to lower overall portfolio risk.

Now, everyone’s financial goals and risk-tolerance are unique, so I can’t tell you exactly which funds to invest in. However, if I was investing £5k today for the long term, I’d want to have exposure to both high-quality UK companies (large and small) and top companies listed internationally. So I’d choose a selection of UK-focused funds, as well as some global equity funds. You can find more information on six funds I like for 2020 here.

Average in over time

Finally, once I’d chosen my funds, I’d drip-feed the £5k into the funds on a monthly basis, instead of investing it all in one lump sum. The reason I’d do this is that it would minimise the chance of investing a lump sum at the top of the market and losing money if stock markets were to fall significantly. There’s nothing worse than investing a large amount of money and seeing the value of your investment drop 10% or 20% immediately. 

So, that’s my take on how to invest £5k in the UK. If you’re looking for more investment ideas, you’ll find plenty of great information at The Motley Fool.

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Edward Sheldon owns shares in Hargreaves Lansdown. 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.