What are my investment options?

You'll need to decide whether you want to select and manage your investments yourself, or choose a management service to do this for you. In this guide we'll explain the three main options:

  • Picking your own investments: choosing your own investments to build up a self-managed portfolio
  • Investing in a multi-asset or multi-manager fund: choosing and investing in a ready-made portfolio through a fund run by one or more fund managers
  • Using a discretionary management service: choosing your goals and risk tolerance, and letting the management service manage your investments for you

However you choose to invest, you can usually do so through a fund platform. This is an online service that allows you to choose, hold and manage your investments. Our platform comparison tool breaks down the services and charges of different platforms, so you can choose the best one for your needs.

Self-managed portfolio

This involves putting together your own investment portfolio, by selecting a combination of assets that meets your investment goals. You'll also need to monitor your investments regularly to make sure they're still appropriate for your needs.

One way to do this is to invest directly in shares on the stock market. However, for most investors the easiest and cheapest way to invest is through investment funds. In an investment fund, your money is pooled with that of other investors in order to gain exposure to a wider range of assets in a cost-effective way.

Putting together your own investment portfolio will usually involve investing in a blend of funds that focus on the types of investment you think will do well. These funds will invest in a particular market sector or asset, such as UK equities or global bonds, with the underlying assets selected by a fund manager. You'll need to spread your investments across more than one fund, in order to achieve the right level of diversification.

Jargon buster: "Diversification" means "not having all your eggs in one basket"; it's a way to spread your risk by combining assets and market sectors with different levels of risk, with the aim of providing smooth returns.

Different assets will respond differently to various market conditions, so having a diverse portfolio can help you to reduce your exposure to certain types of risk, as well as reducing the impact of short term fluctuations in the market.

Passive or active funds?

If you're building your portfolio with funds, you can choose between passively or actively managed funds (or a combination of the two).

A passive investment fund is one which simply tracks the performance of an overall stock market index, such as the FTSE 100. That’s why these funds are often called trackers. Actively managed funds are run by fund managers who pick certain stocks to try and outperform the market.

Benefits of passive investment funds:

  • The fees are usually lower than for actively managed funds. Because of this, some investors argue you’re more likely to achieve long term higher returns after costs are taken into account.
  • It's easy to achieve a high level of diversification with minimal effort for the investor.

Benefits of actively managed funds:

  • Unlike passive funds, they can take strategic measures to respond to changes in the market – for example, to take a defensive position if they believe markets will fall.
  • Whereas a passive fund follows the performance of an index, a skilled manager has the potential to outperform the market.

With an actively managed fund, you're backing the expertise of the manager – which can be both an advantage and a disadvantage.

Multi-asset and multi-manager funds

In this type of fund, the fund manager will create a portfolio of assets aimed at meeting specific goals, such as income, capital growth or both. All you need to do is choose a fund that is closely aligned with your goals and attitude to risk. This type of fund is offered by Momentum in the form of their Factor Series funds, as well as other companies such as Hargreaves Lansdown.

Both "multi-asset" and "multi-manager" are umbrella terms which cover a wide range of investment options.

Multi-asset investing is simply an approach that involves investing across different asset classes (such as equities, bonds, property etc).

A multi-manager fund invests in several different funds, each run by individual fund managers. This is also known as a "fund of funds".

So "multi-manager" can be a subset of "multi-asset". Essentially, "multi-asset" describes the approach to constructing a portfolio, and "multi-manager" is a way of achieving this.

Both approaches are ways to achieve diversification in your investment portfolio:

  • Multi-asset funds aim to provide diversification by investing in different asset classes.
  • Multi-manager funds aim to provide diversification using the skills of different managers.

Advantages and disadvantages of multi-asset funds

The main advantage of multi-asset funds is that they allow you to achieve a well-diversified portfolio much more cheaply than if you invested directly in individual assets. This is largely because of their size.

If you're invested in a fund that's exposed to a wide range of assets, it is likely that when returns from some are falling, returns from others will be stable or rising – because market conditions affect different asset classes in different ways. This can help you to achieve smooth and stable returns over time.

Both an advantage and a disadvantage of multi-asset funds is that you're backing the fund manager's view of the market and their ability to execute their chosen strategy. Investing in a fund with just one manager leaves you vulnerable to manager risk; the risk that the manager makes a bad decision which negatively impacts on your returns.

Advantages and disadvantages of multi-manager funds

The key benefit of multi-manager funds is that they allow industry experts to manage each asset class – rather than one manager running an entire portfolio. This reduces your exposure to manager risk, and means that the people managing your investments have access to industry insights that aren't always available to individual investors.

The main disadvantage is that multi-manager funds often have higher charges, because of the extra layers of management involved.

Discretionary management services

Discretionary management services are relatively new to the investment market. Essentially, you tell the manager about your investment goals, timeframe and attitude to risk, and they invest your money for you. Unlike investing in one multi-asset/multi-manager fund, your portfolio will usually be split across several different funds and other assets.

Advantages of using this type of service include:

  • It's often easier to see exactly what you're invested in
  • You don't need to worry about the day-to-day management of your portfolio
  • This type of service is usually pretty cost-effective, partly because they're still relatively new

Disadvantages include:

  • This approach relies on putting your trust in someone else to manage your investments. As with managed funds, this can be both an advantage and a disadvantage.

Capital Gains Tax – differences between funds and discretionary management

When you sell an investment and make a gain, you will need to pay Capital Gains Tax (CGT) if your gains exceed your annual allowance of £11,500. A key difference between multi-asset/multi-manager funds and discretionary management services is the way your CGT liability is affected.

Within a fund: if a manager sells a holding and makes a gain, there is no immediate consequence for you. You'll only need to declare a capital gain when you sell out of the fund.

With a discretionary management service: if a manager sells an investment for you and it makes a gain, you're liable for CGT each time – and if one of your investments is sold and makes a loss, that offsets your CGT in the same way. The crucial difference is that you hold each investment individually, meaning that there is a tax consequence for each trade.

Choosing how to invest

How would you most like your investments to be managed? It's up to you. The three options we've discussed all have different benefits and perhaps the key difference is the level of involvement you want. You'll need to consider:

  • How involved you want to be with managing your own investments
  • What level of diversification you want to achieve
  • How confident you feel in relying on a fund manager
  • What level of cost you feel is appropriate

Whichever route you take, it's always wise to monitor your investments regularly – at least quarterly – to make sure they're still helping you to achieve your investment goals.

Last updated: 05 February 2016