£500 saved and want to get started with an investment portfolio? There are plenty of different investment strategies to use. However, I wouldn’t invest directly in UK shares just yet as execution costs could eat up a substantial proportion of the investment.
Although some online stockbrokers now offer commission-free trading, other costs, such as stamp duty, which is usually set at 0.5% of the transaction value, and the spread between the buying and selling prices on offer, can’t be avoided.
Then there’s the problem of diversification. A lump sum of £500 isn’t really enough to build a diversified portfolio effectively. Instead, an investor might end up owning just one or two stocks, which can be quite risky.
Luckily, there are plenty of other ways of investing a small lump sum in the UK shares.
Building a portfolio of UK shares
The most straightforward way to build a diversified portfolio of investments is to buy a fund. There are thousands of different funds on the market, many of which claim to follow different investment strategies.
This crowded universe may seem confusing at first. To overcome the bewildering array of funds on offer I tend to focus on passive tracker funds and investment trusts.
Passive tracker funds replicate the performance of a stock index, such as the FTSE 100. All the fund manager has to do is duplicate the underlying stock index. There’s almost no risk the fund manager will pick the wrong investments.
What I’d keep an eye on however, is cost. The best passive tracker funds on the market charge fees of less than 0.1% a year. As they all do the same thing, there’s no need to pay any more than this basic charge.
Owning a passive tracker fund is one of the best ways to invest a small lump sum. Transaction costs and fees are usually minimal, and it provides instant diversification.
Investment trust options
Focusing on investment trusts is another strategy I use. Investment trusts are different from passive tracker funds because they usually have an investment manager who picks assets to buy and sell. They can also invest in other asset classes.
Two of my favourite investment trusts, Personal Assets Trust and RIT Capital Partners, invest in assets such as gold, hedge funds and private businesses, for example. It would be difficult for me to own a similar portfolio of investments without teaming up with other investors.
If one’s comfortable buying an investment trust, such as the two listed above, then this could be an attractive strategy to invest £500 right now in UK shares. If not, then I’d choose to buy a passive tracker fund as this would give access to the market with minimal fees and research, and maximum diversification.
Rupert Hargreaves owns shares in Personal Assets Trust. The Motley Fool UK has no position in any of the shares mentioned. 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.