Establishing a well-allocated portfolio can be a tricky process when you're just getting started in investing. Beyond figuring out what asset mix is appropriate for you, the process of implementing your target allocation can itself be a challenge when you have smaller amounts of money at your disposal.
If you haven't yet developed a substantial nest egg, it can be hard to spread your money out to get exposure to a diversified array of asset classes, and many funds have minimums high enough to complicate getting started. A minimum initial purchase of £2,500 is not uncommon, which starts to seem intimidating if you're a new investor who wants to diversify between a handful of funds. Luckily, there are ways for those with modest investing funds to get allocated.
Employer-Sponsored Schemes
If you're just starting out, your employer-sponsored pension scheme is your best friend. Because investment minimums are typically waived for participants, company pension schemes make it easy to slowly build up money in different investments.
And getting your asset allocation on track is painless within a company scheme--simply assign the percentage of your contributions directly to each investment you select. Of course, you may need to rebalance your existing holdings over time if your allocation is substantially out of whack. Most employers also contribute to company pension schemes, so if your company is offering to contribute a set percentage of your salary, or even to match your contributions, make sure you take them up on their offer. Otherwise you're turning down free money.
Target-Date Funds
Target-date funds allow you to get diversification in one shot, through investing in a single fund. You invest in a target-date fund for the date when you expect to retire, and the fund manager handles the nitty-gritty allocation details, changing your holdings as you get closer to retirement so that you have, for example, fewer equity holdings and more bond holdings.
Target-date funds from different companies can vary substantially in the types of holdings they have and their "glide paths," or the allocation course they follow as you approach your retirement date. Look at target-date offerings for your estimated retirement date from several different companies to choose one that suits you. The downside to this option is that you give up full control of your investments--you are essentially handing over the reins of your portfolio to your target-date manager. Use our Fund Quickrank and select one of the Morningstar target-date categories to rank funds in this area. Alternatively, you could use a target-date fund's portfolio allocation as a guide to creating your own portfolio.
Low-Minimum Funds
If you're more of a do-it-yourself investor, the most straightforward option--simply scouting out funds with low minimums--can also work. Morningstar's Fund Screener allows you to search for funds available for sale in the U.K. by minimum initial purchase and by total expense ratio, among other criteria. Select funds that either require a minimum of £1,000, £500 or even just £1. Screening for funds that can be held in an ISA, for example, thus minimising tax on gains or returns, yields 94 results that do not insist on a minimum initial purchase amount
If you take a low-minimum option, you'll probably be making lots of small additional purchases, so you should also look at funds' additional purchase minimums. In addition to using the screener, you can find minimum purchase information for regular investments and ISA-eligible funds on each Morningstar.co.uk fund report.
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