Mutual funds allow you to invest in the financial markets without you needing to have an inch of trading knowledge.
Instead, you simply need to choose a mutual fund that meets your needs, deposit some funds, and that’s it – the provider will buy and sell assets on your behalf. However, there are hundreds of mutual funds from a variety of sectors, so knowing which one to go with can be challenging.
In this guide, we explore the best UK mutual funds of 2021. We also explain how mutual funds work, how you can choose a provider that meets your needs, and what you need to do to make an investment today.
Table of Contents
Top 6 Mutual Funds UK
Don’t have time to read our guide in full? Below you will find an overview of the best mutual funds of 2021.
- Fundsmith Equity – Top-Performing UK Mutual Fund
- LifeStrategy 80% Equity Fund – Highly Diversified Portfolio of Funds
- Blackrock UK Fund – Strong Focuses on Large UK Companies
- Vanguard High Yield Corporate Fund – Diversified Bond Portfolio
- ASI Global Smaller Companies – Invest in Small-Cap Stocks
- MI Chelverton UK Equity Growth Fund – Portfolio of AIM-Listed Firms
2021’s Best Mutual Funds Reviewed
There are UK mutual funds to suit most appetites. Whether you’re after a low-risk fund that tracks blue-chip stocks or a fund that targets emerging market bonds – your options are plentiful. But, this can make it somewhat difficult to where to start.
With this in mind, below we’ve listed a selection of the best mutual funds of 2021 – alongside a brief review of what each investment offers.
1. Fundsmith Equity – Top-Performing UK Mutual Fund
The Fundsmith Equity mutual fund is managed by UK stock market veteran Terry Smith. Although it was launched just 10 years ago, it is now one of the most sought-after mutual funds in the UK. Over the past three years alone Terry Smith has netted returns of 49%. This means that the fund has outperformed the wider markets by a considerable amount.
Such large returns would hint at a somewhat reckless approach to investing. However, Fundsmith Equity is anything but. On the contrary, Terry Smith focuses on strong and stable companies that in most cases – have a long-standing track record of paying dividends. In particular, 82.42% of the fund’s portfolio is focused on international stocks. Most are heavyweight US firms – including the likes of Microsoft, Paypal, Philip Morris, Facebook, and Estee Lauder.
Apart from a small allocation of cash reserves, the rest of the portfolio is made up of UK shares. In terms of making an investment, you can either go through an online broker like Hargreaves Lansdown or go direct with Fundsmith Equity itself. The latter is often preferred by UK investors as you will benefit from lower account minimums, as well as the ability to diversify into other mutual funds through a single investment platform.
Your capital is at risk.
2. LifeStrategy 80% Equity Fund – Highly Diversified Portfolio of Funds
Diversification is key in all segments of the financial markets. With this mind, one of the most diversified mutual funds available to UK investors is that of the LifeStrategy 80% Equity Fund. First and foremost, the fund – which is provided by Vanguard, has an 80/20 split of stocks and bonds, respectively. However, the fund manager does not personally select which assets to buy and sell.
Instead, its portfolio contains an extensive range of funds. In other words, this is a mutual fund that contains heaps of ETFs and other investment funds. For example, there are individual funds such as the FTSE UK All-Share Index, as well as the US Equity Index Fund.
You will also get a diversified portfolio of funds that target both emerging and developed markets. Outside of stocks and shares, the fund also allocates funds to government bonds. In terms of gaining access to the LifeStrategy® 80% Equity Fund, you might want to consider going through Vanguard. The provider in question charges as an ongoing fee of just 0.22%, which is very competitive for what the fund offers.
The minimum investment with Vanguard is just £500. But, if you elect to make regular investments via direct debit, the minimum stands at just £100 per month. Either way, you will not be charged anything when you eventually get around to cashing in your investment.
Your capital is at risk.
3. Blackrock UK Fund – Strong Focuses on Large UK Companies
If you’re looking to invest in a mutual fund that focuses on UK-listed companies, then you might want to consider the Blackrock UK Fund. 77% of the fund’s portfolio is made up of large-cap UK firms – many of which pay dividends.
This includes the likes of AstraZeneca, Rio Tinto, London Stock Exchange Group, Next, and Rightmove. The rest of the portfolio consists of international equities. The portfolio is well-diversified across heaps of sectors and industries. This includes consumer staples, energy, health care, telecommunications, and financials.
You can invest in this mutual fund at an average ongoing maintenance fee of 0.92%. Although this slightly on the pricey side, the Blackrock UK Fund has performed very well over the past decade.
Your capital is at risk.
4. Vanguard High Yield Corporate Fund – Diversified Bond Portfolio
If you’re looking to invest in the global bond market, you might want to consider the Vanguard High Yield Corporate Fund. The fund in question has been around since the late 1970s, and it focuses much of its efforts of corporate bonds. At the time of writing, this consists of 557 individual bonds with an average maturity of 4.5 years.
This translates into an average coupon rate of 5%. It is important to note that the Vanguard High Yield Corporate Fund will rarely hold on to bonds to maturity. Instead, the fund manager will look to buy and sell bonds on a short-term basis.
This is with the view of profiting from ever-changing bond yields. The Vanguard High Yield Corporate Fund ensures that it is well diversified, with various corporate sectors covered. This includes telecommunications, capital goods, energy, and technology.
Your capital is at risk.
5. ASI Global Smaller Companies – Invest in Small-Cap Stocks
The ASI Global Smaller Companies mutual fund looks to focus on small-cap companies. The fund is diversified across a variety of the UK and international markets. For example, its portfolio consists of 4.6% in US-based Generac Holdings, 4.1% of Israel-based Kornit Digital, and 3.79% in Australian-based Appen.
You will also be gaining exposure to the Asian markets, with stocks purchased in firms from Japan and Taiwan. In terms of sectors, much of the portfolio is focused on industrials and non-essential goods. In terms of performance, the ASI Global Smaller Companies fund is just over 10% up for the year.
Your capital is at risk.
6. MI Chelverton UK Equity Growth Fund – Portfolio of Aim-listed Firms
If you’ve got a slightly higher appetite for risk, you might be considering firms listed on the AIM (Alternative Investment Market). For those unaware, the AIM is the UK’s secondary stock exchange. It is home to small-to-medium companies that are yet to make it big.
With this in mind, your risk vs reward ratio will be much higher than the other mutual funds listed on this page. However, the best thing about the MI Chelverton UK Equity Growth Fund is that you will be extremely well-diversified.
Not only in terms of company numbers but also sectors. For example, the mutual fund holds shares from the financial services, basic materials, industrials, technology, and healthcare sectors. The largest holding in the fund is that of Future PLC at just 2.13%. After that, the fund favours Premier Foods, Weir Group, and Clinigen Group.
Your capital is at risk.
What Are Mutual Funds?
In its most basic form, mutual funds allow you to invest money with a large-scale institution. Your money will be pooled together with thousands of other investors, which then gives the mutual fund a huge war chest which typically runs into the billions of pounds.
The mutual fund in then responsible for buying and selling assets on your behalf. In this sense, the end-to-end investment process is 100% passive. In other words, once you invest money into your chosen mutual, there is nothing more for you to do.
This is hugely beneficial if you have an interest in the financial markets but you don’t know where to start. After all, the process of selecting individual stocks effectively can take many years to master. Even if you do have the ability to make investment decisions, you might be seeking a passive income that doesn’t require any of your time.
Although mutual funds are tasked with making you money, you might be surprised to learn that the fees involved are often low. In fact, some of the best mutual funds in the UK charge less than 0.5% per year. This offers tremendous value when you consider what you are getting for your money.
How do Mutual Funds Work?
As we briefly noted earlier, UK mutual funds typically have thousands of investors under their belts. This can be anything from a small-time investor that seeks to inject a few hundred pounds, to a large-scale financial institution.
Collectively, this providers the mutual funds with the resources its needs to access markets that might otherwise be difficult to reach. As an investor, you will own a part of the mutual fund’s portfolio – proportionate to the amount you invest.
- Let’s suppose that you invest £10,000 into a mutual fund that invests primarily in UK stocks
- 5% of the portfolio is in AstraZeneca shares, and 4% is in British American Tobacco shares
- In effect, £500 of your investment is in AstraZeneca and £400 in British American Tobacco
If the mutual fund decides to sell its holdings in a particular asset, this will be reflected in the value of your investment.
Making Money From a Mutual Fund
In terms of making money with a mutual fund investment, this can come in two forms – capital gains and income.
The main focus of a mutual fund is to increase your wealth through capital gains. This is when you sell an asset for more than you originally paid.
For example, if you buy £5,000 worth of HSBC shares and sell them two years later for £7,000 – your capital gains amount to £2,000 (40%). However, the process of calculating your capital gains is slightly more complex when investing in a mutual fund. This is because the value of your investment is based on the NAV (Net Asset Value).
In simple terms, this is the total value of assets held by the fund – at current market prices.
- Let’s suppose that you invest £5,000 into a UK mutual fund
- At the time of the investment, the fund has a NAV of £1 billion
- The fund invests in stocks and bonds
- A few years later, the UK mutual fund has a NAV of £1.2 billion
- This means that it has made gains of £200 million – or 20%
As per the above example., the value of your investment is now worth 20%. As such, if you opted to cash out your investment from the fund, you would receive £6,000. This is an additional £1,000 to what you started with.
Mutual funds also give you the opportunity to earn money in the form of regular income. This in itself can come in two different forms. For example, if the mutual fund is holding stocks, then you will be entitled to your share of any dividends.
Once again, the amount that you receive is dependent on how much you invest. If your chosen mutual fund also invests in bonds, you will be entitled to a share of coupon payments.
Crucially, dividend and bond distributions are typically made on a quarterly basis. As and when the distribution is made, the payment will be reflected in your brokerage account. If you went direct with the fund, then the cash will be deposited into your bank account.
Types of Mutual Funds
UK mutual funds are generally split into four categories, which we discuss in more detail below.
Equity Mutual Funds
As the name suggests, equity mutual funds invest primarily in equities (stocks). With that said, there are many different strategies that fund managers might explore. For example, some funds will focus on UK stocks, while others will target international firms.
In terms of risk, some mutual funds will stick with strong and stable equities, while others will target small-cap firms. You then have equity mutual funds that take a more diversified approach when investing. For example, they will have a good balance of the UK and international stocks.
There are also equity mutual funds that focus on a specific sector or industry. For example, the fund might only buy stocks in technology firms like Facebook, IBM, and Microsoft. Ultimately, equity mutual funds allow you to make money through capital gains and dividends.
Bond Mutual Funds
If stocks aren’t of interest to you, then you might want to consider a bond mutual fund. These are mutual funds that invest exclusively in income-generating bond instruments. While some funds will only touch corporate bonds, others prefer to focus on government securities.
Much like equity mutual funds in the UK, bond funds come with varying risk levels. For example, a super low-risk bond fund might only invest in government bonds issued by leading economies. This might include the US, UK, Japan, and the European Central Bank.
At the other end of the spectrum, there are bond mutual funds that target the emerging markets. These bonds pay very generous coupon rates, albeit, the risks of default are much higher. On top of making money through coupon payments, bond funds will also look to make capital gains.
This is because the fund will rarely keep hold of a bond until maturity. Instead, it will look to take advantage of changing bond yields by offloading them at a profit. These profits will increase the NAV of the fund and in turn, the value of your investment.
Balanced Mutual Funds
If you don’t want to overexpose yourself to a basket full of either stocks or bonds, then you might want to consider a balanced mutual fund. For example, a higher risk fund might have a 70/30 split of stocks and bonds, respectively. At the other end of the spectrum, a lower risk fund might take an 80/20 split in favour of government securities.
Money Market Mutual Funds
You also have the opportunity to invest in UK mutual funds that target the money markets. For those unaware, this means that the mutual fund will invest in short-term debt. These are typically high-grade debt instruments such as UK Gilts of US Treasuries.
The yields on a money market mutual fund are going to be much lower than the other fund types we have discussed. This is due to the low-risk nature of the assets that the fund will be investing in.
Benefits of Mutual Funds Investment
Mutual funds investment offers a range of benefits that are likely to appeal to most investors.
- Passive Income: Mutual funds give you the opportunity to earn passive income. Once you make an investment, the fund will take care of the rest by buying and selling assets on your behalf.
- Perfect for Newbies: Trying to figure out if you should buy shares can be difficult – especially if you are a complete novice. By investing in a mutual fund, you can gain exposure to your chosen financial market without needing to have any experience.
- Low Fees: Both mutual funds and ETF trading allow you to invest without breaking the bank. Instead, you’ll often find that annual maintenance fees are under 0.5%.
- Growth and Income: Mutual funds allow you to grow your money in two forms. Firstly, you can make money when the value of the assets held by the fund increases. Secondly, if the fund holds stocks or bonds, you can make money through dividends or coupon payments, respectively.
- Liquid: In most cases, mutual fund investments are highly liquid. This means that you can offload your investment at any given time. This is ideal if you need access to fast cash.
Risks of Mutual Funds UK
You shouldn’t make the mistake of thinking that your mutual fund investment is 100% safe just because it is being managed by a large-scale institution. On the contrary, there are countless examples of mutual funds getting to the end of the calendar year having made a loss. After all, mutual funds investment is often at the mercy of market forces.
For example, most mutual funds lost money in the midst of the 2008 financial crisis. This was especially the case for those invested primarily in the stock markets. You also need to remember that some mutual funds will invest in the emerging markets.
While this does mean that you have the potential of making more lucrative returns, some funds of this nature are in double-digit losses for 2020. As such, you should never invest in a mutual fund and expect to make guaranteed profits. Instead, you should take a cautious approach to invest and diversify as best as possible.
What to Look for When Buying Mutual Funds
With hundreds of mutual funds active in the UK market, you need to do some homework to find a provider that meets your long-term investing goals.
To help you along the way, below we have listed some of the main factors that you need to consider when choosing a mutual fund.
Type of Mutual Fund
You first need to think about where you want your money to go. For example, are you looking to gain exposure to the US stock markets, or are you more interested in backing small-to-medium firms based in the UK? Additionally, you might be looking to invest in a bond mutual fund or one that takes a more balanced approach.
Level of Risk
All UK mutual funds have a risk vs reward ratio that you need to take into account. In other words, the more risk they take, the more returns you should expect as an investor. If you simply want to benefit from a low-risk passive income stream, you might be best to stick with mutual funds that invest in high-grade stocks and bonds.
Regarding the former, this would include blue-chip firms like AstraZeneca, GlaxoSmithKline, or IBM. And with the latter, this would focus on US and UK government securities. If you’re looking to chase higher returns, then you might want to consider a mutual fund that targets the emerging markets.
Although past performance is never indicative of future returns, it does give us an idea of what to expect. A good starting point is to see what the ROI of the fund is over the past five years.
This gives the fund enough time to ride the ups and downs of the markets. You should also pay particular attention to how the mutual fund has performed in relation to the wider stocks and shares arena.
For example, if your mutual fund made 10% last year, and the FTSE 100 grew by just 7%, then this means that the fund outperformed the market.
You also need to explore how much you will be required to invest in your chosen mutual fund. If using a third-party stock brokers, then this is typically around £100. Some platforms allow you to invest on a monthly basis via direct debit. This stands at just £25 with Hargreaves Lansdown.
Mutual funds are in the business of making money. As such, you will need to pay a fee for the services that they provide. With that said, the fees associated with mutual funds are actually very competitive. In most cases, you simply need to pay an annual maintenance fee that sits below the 0.5%-mark.
This is charged as a percentage against the amount you have invested with the mutual fund. For example, if the annual fee amounts to 0.5% and you have £10,000 invested, you’ll pay just £50 per year.
In rarer cases, you might need to pay a performance fee. This is where the mutual fund gets a commission on the profits that they make for you. For example:
- Let’s say that the fund makes annual gains of 20%. on your £10,000 investment.
- This means that your money has grown by £2.000.
- If the provider charges a performance fee of 10%, then they will collect £200 from your profit.
- This will then leave you with a net gain of £1,800.
If your chosen UK mutual fund does charge a performance fee, this shouldn’t necessarily put you off. After all, the fund is financially motivated to make you as much money as it can.
Some mutual funds install a minimum redemption period into their terms and conditions. This means that you are unable to make a withdrawal until a certain amount of time has passed. For example, let’s say that you invest £5,000 into a fund on January 1st 2020.
If the fund has a minimum redemption period of 12 months, you won’t be able to get your money out until January 1st 2021. You should probably avoid such providers if you think that you need to access your investment funds at short notice.
Best Mutual Fund Brokers
So now that you know the ins and outs of how mutual funds in the UK work, we are now going to explore which platforms allow you to make an investment.
1. eToro - World Leading Social Trading Platform with 0% Commission
eToro is an online broker that is regulated by the FCA. It is now home to over 12 million traders - many of which are based in the UK. On the one hand, eToro does not offer mutual funds. On the other hand, it offers an extensive library of ETFs. For those unaware, ETFs allow you to invest in a group of assets - such as stocks, bonds, and funds, through a single trade.
The ETF will be managed by a large-scale provider such as Vanguard or iShares - meaning that the entire investment process is passive. If you think that this sounds like mutual funds, then you wouldn't be wrong. However, the key difference is that ETFs are substantially cheaper to invest in, especially when using eToro. This is because eToro does not charge any trading commissions - nor will you need to pay any maintenance fees.
In terms of markets, eToro offers ETFs on everything from FTSE 100 stocks, to high-grade bonds, and even gold. Best of all, you only need to meet a small investment of $50 per ETF. If you fancy adding a few stocks and shares to your portfolio, eToro gives you access to over 1,700 equities from 17 UK and international markets. Again, this can be achieved on a commission-free basis. If you're a fan of passive income, you might also like the Copy Trading feature.
This allows you to select an expert investor that you like the look of, and then copy their trades like-for-like. If you like the sound of eToro, the broker allows you to open an account in minutes. You can instantly deposit funds with a debit/credit card or e-wallet. Minimum deposits start at just $200, which is about £160. Most importantly, eToro is partnered with the FSCS. It also offers an excellent mobile investment app.
- Trade assets commission-free
- Regulated in the UK by FCA
- Social trading tools
- User-friendly trading platform
- 0.5% currency conversion fee on deposits
2. Hargreaves Lansdown - Invest in More Than 3,500+ Funds
Hargreaves Lansdown is well known in the UK investment arena. The platform is especially popular with newbie traders, as the process of opening an account, depositing funds, and making an investment can be completed with ease. The broker is also strong when it comes to research and analysis, alongside market insights on everything from stocks to bonds, and ETFs.
In terms of its mutual fund offering, Hargreaves Lansdown is home to over 3,500 markets. You can filter your chosen fund down by the target market (UK, US, Asia, etc), or the types of assets it likes to focus on (high-grade stocks, emerging government bonds, index funds, etc.). In terms of fees, Hargreaves Lansdown doesn't charge a commission to access your chosen fund. You will, however, need to pay an annual maintenance fee.
The specific amount will depend on the fund in question. For example, the likes of Fundsmith Equity will cost you 0.95% per year. In most cases, you can invest a lump-sum of just £100 at Hargreaves Lansdown. Alternatively, if you opt for a direct debit, this goes down to just £25 per month. You can fund your account with a debit card or via a UK bank transfer.
- Trusted name in the UK brokerage scene
- Heaps of index funds, stocks, ETFs, and more
- Invest from just £100
- More expensive than other UK brokers in the space
3. Vanguard - Invest Directly With a Mutual Fund Leader
Vanguard is one of the largest fund providers in the world. In recent years, it has been targeting the retail investment scene. In other words, it is looking to open the mutual fund doors to the Average Joe. This is evident in the fact that minimum investment amounts are typically as low of £500. Alternatively, you can inject just £100 per month via a UK direct debit agreement.
Fees are also super-competitive when investing directly with Vanguard. This stands at an average of just 0.22% in annual maintenance fees, and no charges to deposit or withdraw. In terms of mutual fund types, Vanguard has most bases covered. This includes funds that invest in blue-chip and small-cap stocks and bonds from the corporate of government securities sectors.
- Invest directly with a leading index fund provider
- Annual fees are very low
- Choose from a one-off investment or monthly payments
- Some Vanguard index funds can be invested in commission-free with a UK broker
- £500 minimum is on the high side
How to Invest in Funds on eToro
If you’re keen to invest in a fund today but you’re not too sure where to start, we are now going to walk you through the process with eToro. Although this FCA regulated broker doesn’t offer mutual funds per-say, you will have access to over 150+ ETFs.
As we covered earlier, both ETFs and mutual funds are virtually identical. But, when opting for an ETF at eToro, not only will you benefit from 0% fees and no maintenance charges. But, you can instantly cash out your investment at any time during standard market hours.
Step 1: Open an Investment Account
To get the process started, visit the eToro website and open an account. You’ll be asked to enter some personal information, alongside your contact details. You will also need to confirm your mobile number by entering a unique PIN that is sent to your phone.
To complete the account opening process, you will be asked to upload a copy of your government-issued ID (passport or driver’s license). You will also need to provide a proof of address. This can be a utility bill or bank account statement issued within the prior three months.
Step 2: Deposit Funds
You will now need to deposit some funds.
Your choice of payment methods include:
- Debit card
- Credit card
- Bank Transfer
You’ll need to meet a minimum deposit of at least $200 (about £160) at eToro.
Step 3: Invest in a Fund
You are now ready to invest in a fund. If you want to see what funds are available, head over the ETF department. You’ll find this by clicking on the ‘Trade Markets’ button on the left-hand side of the page.
In our example, we are looking to invest in the Vanguard Total International Bond ETF. As such, we enter this into the search box and click on the corresponding result that loads up.
We then need to click on the ‘Trade’ button.
To complete the process, we simply need to enter the amount that we wish to invest in our chosen fund. This needs to be at least $50, which is about £40.
After confirming the order, you will remain an investor until you decide to exit the position. You will be entitled to your share of dividends and/or coupon payments. This is typically distributed every three months and will be reflected in your eToro cash account.
In summary, mutual funds seem to tick most boxes in the investment arena. Not only do they allow you to invest in a basket of assets at the click of a button, but you don’t need to have any knowledge of how the financial markets operate. Instead, the entire investment process is passive. After all, the fund will buy and sell stocks, bonds, and other instruments on your behalf.
If you’re looking to invest in a fund today, it might be worth considering eToro. The FCA regulated platform allows you to invest in over 150+ ETFs without paying a single penny in commission. You will also avoid the annual maintenance fees that are charged by mutual funds. Moreover, you can get started with a minimum investment of just $50!
eToro: Invest with Funds with 0% Commission
- Invest in funds with no commission
- Wide range of funds
- Social trading network
- Copy other traders
- FCA regulated broker
How do mutual funds work?
Mutual funds allow you to invest on a passive basis. You will be injecting money into a large financial institution, who in turn, will buy and sell assets on your behalf. Your money is pooled together with thousands of other investors, so the fund will likely have a multi-billion pound war chest.
Should I invest in ETFs over mutual funds?
ETFs and mutual funds provide the same service, insofar that the provider will buy and sell assets on behalf of its investors. With that said, ETFs are actually much cheaper than mutual funds. They are also easier to cash out, as ETFs are listed on stock exchanges.
When is the right time to invest in mutual funds?
By investing in a mutual fund, you don't need to worry about timing the market. Instead, all investment decisions are taken care of by the fund.
How are mutual funds taxed?
Unless you hold your chosen fund in a Stocks and Shares ISA, your gains will be liable for tax. This will be the case on your capital gains and any income generated from your portfolio - such as dividends.
Where to buy no-load mutual funds?
You can often buy no-load funds directly from the institution in question (for example Vanguard).
How are annuities different from mutual funds?
The main difference is that annuities benefit from certain tax advantages over mutual funds.
Can you short a mutual fund?
You can't, as mutual funds are not listed on public stock exchanges. You can, however, short-sell an ETF by using an online broker that offers CFDs.