The UK’s financial market offers a diverse range of mutual funds catering to various investment goals and risk appetites.
Distinguishing the top contenders from the plethora can be challenging.
In this article, I’ll unveil the best mutual funds in the UK, shedding light on their strategies, track records, and suitability for different investors.
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Best Mutual Funds to Invest in
With thousands of mutual funds available, narrowing down the choices can be daunting. I’ve researched the options to spotlight some of the best mutual funds that could be a great fit for your portfolio.
Of course, you’ll want to choose funds that match your risk tolerance and strategy.
Check out my top picks:
1. Franklin Templeton UK Smaller Companies Fund
For exposure to the growth potential of UK small-cap equities, the Franklin Templeton UK Smaller Companies Fund is a strong actively managed choice.
- Invests in undervalued smaller UK firms with market values up to £4 billion
- Fund manager Richard Bullas applies a rigorous bottom-up research process
- Seeks to identify growing quality companies trading at reasonable valuations
- Top holdings include Watches of Switzerland, OSB Group, CVS Group
- Has outperformed its benchmark over 3, 5, and 10-year periods
- Ongoing charges of 0.83% are reasonable for active UK small-cap management
By targeting smaller, overlooked firms trading at discounts to intrinsic value, fund manager Bullas has delivered impressive long-term outperformance. Investors gain focused exposure to the higher return potential of UK small caps.
While greater volatility is inherent with smaller companies, Bullas’s emphasis on quality helps manage risk.
Overall, Franklin Templeton UK Smaller Companies is a compelling actively managed option for UK small-cap equity exposure.
2. JOHCM UK Equity Income Fund
For investors seeking equity income along with capital growth potential, the JOHCM UK Equity Income Fund is a strong choice.
- Focuses on undervalued, high-yielding UK stocks
- Managers utilise bottom-up analysis to identify value opportunities
- Top holdings include Shell, Rio Tinto, GSK, and AstraZeneca
- Has outperformed the FTSE All-Share benchmark over 5 and 10 years
- Reasonable ongoing charge of 0.89%
- Minimum investment of £1,000
Lead manager Clive Beagles applies a prudent value-oriented approach seeking overlooked firms with solid dividends trading at discounts. This provides an attractive income stream along with upside potential.
While the UK economy faces uncertainty, the fund’s emphasis on large, defensive blue chips with wide moats helps manage risk. For UK equity exposure and income, JOHCM UK Equity Income warrants consideration.
3. iShares Core FTSE 100 UCITS ETF
For broad exposure to the UK’s largest blue chip stocks in a low-cost index tracking structure, the iShares Core FTSE 100 UCITS ETF is compelling.
- Provides cap-weighted exposure to the 100 largest LSE-listed stocks
- Top holdings are familiar names like Shell, AstraZeneca, HSBC, and more
- Closely tracks the performance of the FTSE 100 Index
- Charges a minimal ongoing fee of just 0.07%
- Easy, diversified access to UK mega-caps
- No minimum investment makes it highly accessible
With its rock-bottom fees, the ETF enables investors to efficiently capture the aggregate performance of the UK’s leading public companies. The fund structure also provides tax efficiency.
While UK economic weakness could pressure returns, the low costs and diversification make this ETF a prudent passive core holding for domestic exposure. The fund simplifies investing in Britain’s equity benchmark.
4. Liontrust Sustainable Future UK Growth Fund
For an actively managed UK equity fund aligned with sustainable investing principles, the Liontrust Sustainable Future UK Growth Fund is compelling:
- Invests in quality UK companies with sustainable business practices
- Managers identify firms addressing long-term societal and environmental issues
- Top sustainable holdings include Croda, Halma, and DS Smith
- Fund has outperformed the FTSE All-Share over 3, 5, and 10 years
- An ongoing charge of 0.89% is reasonable for active sustainable management
- Minimum investment of just £1,000
By focusing on companies making positive contributions from an ESG perspective, the fund provides values-based exposure to UK equities. Its long-term outperformance shows no sacrifice of returns.
For investors seeking active UK stock picking guided by sustainability, Liontrust Sustainable Future UK Growth deserves consideration as a high-conviction option. Its responsible investing approach makes it distinctive.
5. Vanguard LifeStrategy 80% Equity Fund
For a diversified balanced fund tilted toward equities, the Vanguard LifeStrategy 80% Equity Fund is a compelling option:
- Provides a strategic 80/20 allocation between global stocks and bonds
- Invests across thousands of equity and fixed-income securities
- Rebalances to maintain target asset class exposures
- Delivered over 8% annualised returns over the past decade
- Rock-bottom 0.22% ongoing charge
- No minimum investment makes it highly accessible
By maintaining an 80% equity/20% bond split, the fund provides extensive diversification along with growth potential from equities. The asset allocation suits investors with longer timeframes and moderate risk profiles.
The fund’s ultra-low costs, broad diversification, and strategic asset allocation approach make it an attractive one-stop core holding for many investors’ portfolios.
6. Man GLG Undervalued Assets Fund
For concentrated exposure to undervalued UK stocks selected by experienced managers, the Man GLG Undervalued Assets Fund warrants a look:
- Seeks deeply undervalued mid and large-cap UK companies
- Managers conduct intensive bottom-up analysis to find overlooked value
- High conviction portfolio with just 20-40 positions
- Top holdings include Imperial Brands, Bunzl, and ITV
- Five-year returns exceed the FTSE All-Share benchmark
- An ongoing charge of 0.90% is reasonable given active management
Fund managers Henry Dixon and Mark Nash have over 60 years of combined investment experience. Their meticulous research aims to identify pricing mismatches between asset values and stock prices.
While the concentrated UK value focus increases volatility, the fund provides differentiated active management targeting significant upside potential. Patience allows participating in the realisation of underappreciated value.
For access to veteran managers pursuing discounted UK equities, Man GLG Undervalued Assets brings unique positioning. The fund complements broader market holdings.
7. Fundsmith Equity Fund
For a concentrated portfolio of high-quality multinational growth stocks selected by a veteran manager, Fundsmith Equity Fund is compelling:
- Invests in industry-leading international companies with durable competitive advantages
- Manager Terry Smith applies a long-term buy-and-hold approach
- Highly focused portfolio of just 25-30 stocks
- Top holdings include Microsoft, PayPal, Estee Lauder, and more
- 10-year returns exceed the MSCI World benchmark by over 3% annually
- Ongoing charge higher at 1.05% but competitive given strategy
Manager Terry Smith emphasises a straightforward investing approach – buying great companies globally at attractive valuations and holding them for the long term.
This high-conviction strategy has delivered exceptional returns.
While the focused portfolio amplifies volatility, Fundsmith provides differentiated exposure to some of the world’s strongest growth franchises. For globally diversified core holdings, it warrants strong consideration.
What Is a Mutual Fund?
A mutual fund represents a portfolio of securities like stocks and bonds that are pooled together from many individual investors. The fund provides diversified exposure to the asset classes and strategies tied to its investment mandate.
Mutual funds come in actively managed and passively managed structures. Actively managed funds have portfolio managers constantly analysing holdings and making trades to achieve the fund’s goals.
Passive funds follow rules-based indices and rebalance on a defined schedule.
Every mutual fund charges expense ratios to cover costs. Actively managed funds tend to have higher fees since they require ongoing oversight from managers and analysts. Passive funds simply track an index, keeping fees low.
Fund managers construct portfolios matching their specific focus – growth, income, sector-specific, geographic, and more. This strategic basket of assets provides built-in diversification based on the fund’s objectives and risk profile.
By purchasing shares in a mutual fund that aligns with their investment goals, investors can benefit from tactical management, diversification, and ease of use that would be difficult to replicate alone.
Mutual funds simplify participating in different markets and strategies.
Here’s a good video that further explains what mutual funds are:
How to Choose the Best Mutual Funds for Your Investment Goals
With thousands of mutual funds to choose from, selecting the right ones for your portfolio can be daunting. While the top seven funds we covered offer stellar options, they’re just the tip of the iceberg.
Follow these tips to identify the ideal mutual funds to fulfill your investing strategy and financial objectives.
Evaluate Ongoing Fees
When selecting mutual funds, it is critical to assess the ongoing fees and expenses charged by the fund.
- Expense ratio – This annual fee covers the fund’s operating costs, including management fees, administrative costs, legal/accounting expenses, etc. Expense ratios typically range from 0.05% for passive index funds to over 1% for actively managed funds. Lower is better.
- Redemption fees – Some funds charge fees if shares are sold before a minimum holding period, intended to discourage short-term trading. This should be considered for funds you may want to sell quickly.
- 12b-1 fees – Used to cover fund marketing and distribution costs. Typically 0.25% or less but still impacts long-term returns.
- Account fees – If investing through a brokerage account, watch for maintenance, transaction, and other account-level fees.
- Sales loads – Front-end or back-end commissions when buying or selling shares. These are better avoided.
Add up all recurring fees to determine the total annual costs. While higher fees don’t automatically preclude a fund, paying more reduces your ultimate returns.
Favor funds with competitive fee structures aligned to their strategy and value proposition.
Align with Your Investment Strategy
Choosing mutual funds requires clearly defining your overall investment strategy based on:
- Goals – What are you investing for? Retirement? Education? Home purchase? Know your timeline and specific dollar needs.
- Risk tolerance – How much volatility can you stomach? Are you comfortable with higher-risk, higher-return funds or do you prefer stability? Be honest with yourself.
- Tax considerations – Will this be in a taxable or tax-advantaged account? Taxable accounts favor tax-efficient fund structures.
- Income needs – Do you require regular income from your investments? Bonds and dividend funds may be preferable to growth stocks.
Picking compatible mutual funds involves matching their investment mandate, risk profiles, and expected returns to your personal strategy.
An aggressive 30-year-old growth investor has very different needs compared to a conservative 60-year-old income investor.
Discuss aligning mutual fund selections with your overall investing approach with a financial advisor. Choose funds optimal for your situation rather than chasing ephemeral hot streaks. Adhere to long-term financial plans.
Evaluate Past Performance
A mutual fund’s historical returns provide a useful perspective, but should not be the sole factor in decision-making. When assessing performance:
- Look at returns over the longest periods available – 10 years or more is ideal. This smooths volatility.
- Compare returns to the fund’s stated benchmark and peer category averages to gauge competitiveness.
- Ensure positive returns exceed benchmark/category across multiple time periods consistently.
- Consider returns in light of risks taken. The Sharpe and Sortino ratios assess risk-adjusted returns.
- Make sure the fund manager has remained consistent. Manager changes can alter future results.
- Don’t chase unsustainable hot streaks. Reverting to averages is likely.
While past performance does not guarantee future results, a long track record of generating competitive returns in line with its strategy demonstrates the fund’s investment proficiency.
How to Invest in Mutual Funds UK
Investing in mutual funds in the UK involves a straightforward process.
Here’s my quick step-by-step guide for getting started:
- Research: Begin by understanding your investment goals, risk tolerance, and the different types of mutual funds available. Look into funds’ past performance, management fees, and investment strategies.
- Choose a Platform or Provider: You can invest through:
- Directly with Fund Management Companies: Firms like BlackRock, Vanguard, or Fidelity allow you to invest directly.
- Online Investment Platforms: UK investment platforms like Hargreaves Lansdown, AJ Bell Youinvest, or interactive investor offer a wide selection of funds.
- Open an Investment Account: Sign up on the chosen investment app/platform or with the fund provider, providing the necessary personal and financial details.
- Funding the Account: Transfer money from your bank account to your investment account. Ensure you’re aware of any minimum investment requirements.
- Select a Fund: Based on your research, pick the mutual funds you’re interested in. If you’re unsure, many platforms offer tools or advice to help guide your decisions.
- Place an Order: Buy units or shares of the chosen fund. You can typically invest a lump sum or set up regular contributions.
- Monitor Your Investment: Regularly check the performance of your mutual funds against your investment goals. Rebalance or adjust your investments as needed.
- Be Aware of Fees: Mutual funds have associated fees, like management fees or annual charges. Understand these costs and how they can impact your returns.
- Tax Implications: Be informed about tax liabilities related to your mutual fund investments, such as on dividends or capital gains.
- Seek Professional Advice: If in doubt, consider consulting a financial advisor or investment specialist to guide you in selecting and managing your mutual fund investments.
Best Mutual Funds – Final Thoughts
Mutual funds come in endless varieties to match diverse investing goals. Do your homework to identify options that best fit your needs and strategies. While our top seven cover good choices, don’t limit yourself.
Leverage my tips to uncover your ideal mutual fund investments.
With thousands of funds competing for your dollars, taking a strategic approach ensures you maximise returns and minimise regret. Aim to construct a cohesive portfolio of mutual funds and other assets optimised for your objectives.
That and a bit of effort upfront pay dividends down the road.
Are mutual funds worth it?
Mutual funds offer diversification by pooling money to invest in a variety of assets, potentially reducing individual investment risks. They are managed by professionals, making them suitable for investors who prefer hands-off investment approaches. However, fees and performance relative to benchmark indices should be considered before investing.
Do I need to pay tax on mutual funds UK?
In the UK, gains from selling mutual funds may be subject to Capital Gains Tax if they exceed the annual tax-free allowance. Additionally, any income earned from the fund, such as dividends, might be subject to Income Tax. It’s important to consider individual tax allowances and consult a financial advisor or tax professional for specific guidance.
How much money should I invest in a mutual fund?
The amount to invest in a mutual fund should align with your financial goals, risk tolerance, and time horizon. It’s essential to consider factors like current financial situation, future needs, and diversification objectives.
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This content is for informational purposes only and does not constitute financial advice. Investments carry risks, and past performance does not guarantee future results. Always conduct your own research and consider seeking financial advisory services.