How many investment funds should I own?

Ask the experts. Laura Suter is here to answer your personal finance questions. If you’d like a question considered for a future edition send it in now.

Or alternatively leave a rating for the article and include your question in the comment box.

I’m new to investing and have around £8,000 I’d like to put into the market, but I’m feeling overwhelmed by the number of funds available. I keep hearing about diversification, but I’m not sure what that looks like in practice.
Some people suggest just one global fund, while others talk about holding several funds across different regions and sectors. How many funds does a beginner actually need to be properly diversified?
I’m also concerned about accidentally overlapping investments if I pick multiple funds, and whether having more funds really reduces risk or just adds complexity. What’s the simplest way to build a diversified portfolio as a first-time investor?
CF, via email

One thing’s for sure, you won’t be alone by being bamboozled by the options out there. Let’s tackle a key bit of jargon first: diversification. This means making sure you have a spread of different investments that react differently in market rises and falls. If you have a well diversified portfolio it means that if one part of the market falls, your entire portfolio won’t fall at once.

Diversification can mean spreading your money across investments in different countries and different sectors, as well as types of investment. To newcomers that might then feel like you need have loads of different investments or funds to achieve that goal – but that’s certainly not the case.

The role of all-in-one funds

You could actually achieve this diversification goal with just one fund, like you reference, if you buy a multi-asset fund, also called a ready-made fund or all-in-one fund. This will spread your money across different investment types, so shares, bonds, cash and sometimes gold, and will split the money across different countries and sectors.

There are lots of different flavours of these funds, some will be badged as more adventurous and will have more invested in shares, where others will be more cautious, with a higher allocation to bonds, cash or gold. Equally, there are active and passive versions of these funds, depending on your preference. So that’s one easy option if you want a very hands-off approach.

But some people may prefer to put together their own portfolio of funds. You’re right that there are thousands of funds out there, so it can be a bit overwhelming picking the right ones for you. Most investment platforms have a Favourite Funds list, where they have narrowed down the vast universe of funds to give a selection for different sectors, which can help with that selection process.

It’s important to note that you could own 20 funds and still be poorly diversified, so it’s more about the funds you own rather than the number of funds you own – it’s what’s inside the funds not how many you hold. That’s because you could buy two different funds that have overlapping aims and so also own very similar investments. This is particularly common with funds that have broad investing remits, such as global, US or UK funds. When picking funds you want to make sure you know what’s in each one and that each is serving a different purpose in your portfolio.

That means you could achieve a well-diversified portfolio with just three or four funds. For example, a UK fund, some emerging markets exposure, a US focus and then a bond fund. Or equally you could just own a global fund, that invests in shares around the world, plus a bond fund. Everyone’s approach will be different.

It depends how much you have to invest

It also depends how much money you are investing. In your case £8,000 is a decent amount to get started with, but you don’t want to spend a chunk of your savings pot on fees. It costs money to buy and sell funds: with AJ Bell it’s £1.50 for funds and £5 for shares, ETFs and investment trusts. The more of your money you invest (rather than spend on fees) the better off you’ll be in the long term. If you had a much larger portfolio you might be more comfortable buying more funds and so spending more on trading fees. But that’s certainly not necessary.

As a first-time investor the best approach is likely to be to start off simple and build from there, as you increase your knowledge of investing and the money you are putting to work. You can start with a very simple portfolio and then add funds to it as you go. But equally many people who have been investing for a long time have a very simple portfolio – there’s no shame in that.

AJ Bell’s Favourite funds
AJ Bell has its own list of Favourite funds curated by our investment experts. Key criteria include the value they offer investors, their ability to deliver on their objectives, the clarity of the manager’s philosophy, process and their track record. You can filter the list of names by size, charges, your investment goal, fund type, sector and whether they pay out or roll up income. The list is regularly monitored and updated as required.

Related news

Shares Magazine

The role of all-in-one funds

It depends how much you have to invest

AJ Bell’s Favourite funds

Laura Suter: Director of Personal Finance