Best ways to invest £200 per month

Got £200 a month to invest? Here are some of the best ways to do it.

Saving £200 a month is a manageable saving commitment for many people, particularly for a couple. It may mean skipping a few takeaways or the odd morning latte, but it can put you on a firmer financial footing. The good news is that if you start early enough and carry on for long enough, you can build a meaningful pot of cash over the years – as much as £300,000 by the time you’re 65 if you start in your twenties. Find out how you can invest £200 per month and the elements you need to consider.

Pound cost averaging

The beauty of regular savings is that you side-step any problems with market timing. This is the risk that you put all your cash in the stock market just as it has reached its peak and spend the next few years watching it decline. Unfortunately, this is more common than random chance would suggest. As humans, we are programmed to follow the herd – we are reassured when everyone else is optimistic. Unfortunately, this is usually the moment when markets are getting frothy.

If you put £200 in the market each month, you are investing at a range of price points. One month, you may buy when the market is high, and you’ll get less for your money, but the next month you’ll buy when the market is lower and you’ll get more. The technical name for this is “pound-cost averaging”, but in reality, it is just “smoothing” the price at which you buy to give you a more consistent return on your investments. It’s a good idea and also allows you to invest in areas with higher volatility, such as smaller companies or emerging markets.

Compound interest

When you are trying to grow your wealth, compounding is your best friend. A neat way to illustrate it is through the famous parable of the Indian King who grants his servant any wish. The servant requests a single grain of rice, places it on a chessboard and asks the king to double it every day until the board is full. The king grants the wish, not realising that by square 64 he’s giving up 18,446 trillion grains of rice.

OK, no-one is about to turn your £200 of investment into £18,446 trillion. However, it illustrates the principle of compounding. If your investment is £2,000 one year and grows 5%, you have £2,100. If that grows 5%, you don’t make another £100, but £2,100 x 5% = £2,205. Over a number of years, this “growth on growth” becomes increasingly important.

This is why it is important to reinvest any income generated by your investments – interest or dividends. This income is added to the overall pot and helps accelerate the growth. If you choose “accumulation” units when you buy, this happens automatically.

Keep an eye on your costs

The same effect works in the opposite direction for the costs of investment. Anything you pay for your investment detracts from its long-term growth, so watch what you pay. This is particularly important with regular savings. Some investment platforms will charge you a transaction fee every time you invest. If you are only investing £200 and it costs £15 as a transaction fee, that’s taking a significant chunk out of your savings – the equivalent of 7.5% a month.

There is a range of costs involved in investment. You may pay transaction fees, platform fees (which are often charged as a percentage of the investments you hold on the platform), plus a fee for the underlying investment. The key is to know what you’re paying and the drag it exerts on your investment. Ideally, you should keep the ongoing costs of your investments to 1% or lower.

Exchange-traded funds (ETFs) can be a good way to keep the costs of the underlying investments low. It is possible to buy an S&P 500 tracker, for example, for less than 0.1%. If you’re investing £200 a month, an ETF on one of the major world indices – MSCI World, S&P 500, FTSE All Share – is a good place to start.

Investment trusts can be a natural choice

Investment trusts have a rather old-fashioned reputation, but they are widely-used for regular savings. There are some big old beasts that have been serving investors well for decades, such as the £3 billion Monks Investment trust or the £975 million Scottish Mortgage trust. There are also investment trusts investing in specific higher growth areas – the £2.5 billion Allianz Technology Trust, or the £1.3 billion Fundsmith Emerging Equities Trust.

These are actively managed funds and the investment trust structure gives the fund manager a bit more flexibility than a normal collective fund. As a result, many of them have built up impressive long-term track records. They’re also a good option for those who want an income from their investments, because they have the ability to reserve income in good years to pay out in lean years. Trusts such as City of London trust has grown its payout to shareholders for over 50 years.

Check out the robo advisors

Robo advisers are designed to make regular saving easy. You answer a few questions, set up a direct debit and the “robo” does all the hard work of investment selection for you. They’re designed to be low cost and intuitive, and don’t assume any prior knowledge of financial markets. Make sure you pick one that lets you save through an ISA or SIPP wrapper. Well-established providers include Nutmeg or OpenMoney. If you want financial advice from a non-robo source, there are various services such as that of Hargreaves Lansdown.

Invest ethically

There is a new generation of funds emerging, designed to tackle a specific social or environmental problem. These include the Schroder ISF Global Energy Transition fund, which invests in companies helping decarbonisation efforts, or the BGF Circular Economy Fund, which invests in companies supporting the recycling and reuse of resources. There are also generalised impact funds, such as the Baillie Gifford Positive Change fund or the M&G Positive Impact fund. These funds will be available through investment platforms such as Hargreaves Lansdown, AJ Bell or Fidelity FundsNetwork. It may only be £200 a month, but you can be reassured that your money is going to support a good cause.

Bottom line

Investing £200 per month can be a great way to kick start your savings and build some healthy savings habits. Even if it’s not invested, it’s a great way of putting aside money for when you might need it or for some large future purchases. Putting £200 into investments over the long term has the potential to grow, and lets you make the most of pound cost averaging.

Not sure which share trading platform to choose? Compare them with our comparison table.

All investing should be regarded as longer term. The value of your investments can go up and down, and you may get back less than you invest. Past performance is no guarantee of future results. If you’re not sure which investments are right for you, please seek out a financial adviser. Capital at risk.

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