How To Invest £10,000

A bonus, inheritance, savings target, or even a winning lottery ticket, could all amount to a sum of £10,000.

And while this might not seem like a life-changing sum of money, it could grow into a significant nest egg if invested wisely. However, before you do this, ensure you have a sufficient ‘rainy day’ fund put aside for emergencies or unforeseen expenses.

Here’s a look at some of the options available if you’re looking to invest £10,000.

Remember that investing is speculative, not suitable for everyone, and that it’s possible to lose some or all of your money.

1. Investing in funds

Funds are a low-cost way of investing in a ready-made portfolio of assets including equities, bonds and commodities. Some equity-based funds focus on particular sectors, such as technology and healthcare, while others specialise in geographic regions such as the UK and US.

Ryan Lightfoot-Aminoff, senior research analyst at FundCalibre, highlights the advantage of delegating investment decisions to a professional fund manager who, he says, will, “look to create a balance of different companies, industries and revenue drivers to generate above market returns.”

He also advises: “Investors can also benefit from economies of scale when it comes to fees, which can often be a prohibitor to investors who are regularly trading.”

Funds pool money from investors to be invested by a fund manager, and are split into with two main types:

• Actively-managed funds: these aim to ‘beat the market’ by stock-picking and therefore charge a higher annual management fee (typically around 0.5% to 1.0%, compared to 0.1% to 0.2% for a passive fund)

• Passively-managed funds: also known as tracker or index funds, these replicate the composition of an index (for example, by buying shares in all the companies listed on the FTSE 100 or Nasdaq index). 

Whether active funds justify their higher fees by outperforming their passive counterparts remains a contentious topic. Looking at recent performance, it’s varied considerably by sector, with 85% of active funds outperforming passive funds in the UK over the last decade, compared to just 22% for North America, according to AJ Bell.

That said, there’s also a difference in the level of outperformance, with active UK funds delivering an average 10-year total return of 134% compared to 96% for passive funds.

It’s worth taking the time to find the best trading platform to buy and hold these investments, as the fees and choice of investments can vary significantly. Funds can also be held in tax-efficient wrappers such as Individual Savings Accounts (ISAs) and Self-Invested Personal Pensions (SIPPs).

2. Investing in shares

Buying individual shares is higher-risk than investing in funds. However it can be a good way to invest £10,000 if investors have the expertise to carry out their own research on public companies.

FundCalibre’s Mr Lightfoot-Aminoff comments: “Investing in individual stocks can come with a much greater upside potential, but you are taking on significantly greater risk. Investors will not benefit from diversification and are vulnerable to market swings if they aren’t fully active.”

As a result, investors looking to buy shares should aim to diversify their portfolio by holding shares in companies in different sectors and geographic regions. This should smooth out average returns if one company or sector underperforms, although shares should be seen as a long-term investment of at least five years.

As with funds, shares can be held within tax-efficient ISA and SIPP wrappers.

3. Investing in bonds

Investing in bonds could provide investors with a regular income, in addition to a potential capital gain if the price of the bond rises.

Bonds are a form of loan issued by governments and companies, with interest paid once or twice a year in the form of a ‘coupon’. At the end of the term, the issuer will repay the original ‘face value’ of the bond.

As with shares, the price of bonds fluctuates once they start trading, meaning that they may trade at a premium or discount to their ‘face’ value. Bond prices are highly correlated to interest rates – if interest rates rise above the coupon rate of a bond, the bond will be less attractive to investors and its price will fall.

Noelle Cazalis, manager of the Rathbone High Quality Bond Fund, comments: “Bonds tend to be less volatile than equities, which is why they are often favoured by conservative investors.

She adds: “Bonds also often exhibit low correlation to equities.” This means that bonds and shares tend to behave differently during an economic cycle, providing another way for investors to diversify their portfolios.

Government bonds, also known as ‘gilts’ in the UK, are seen as a safer investment and therefore tend to pay lower interest rates. Corporate bonds are rated according to their risk level, with higher-risk bonds compensating investors with a higher rate of interest.

However, bonds are not a risk-free investment as the bond issuer may default on the interest or repayment if they encounter financial issues. Furthermore, bond prices have fallen this year due to the frequent hikes in the base rates in the UK and US.

4. Investing in property

Another option is to put the £10,000 towards a deposit to buy a house. However, it may be challenging to take your first step onto the property ladder given the 25% increase in average house prices over the last three years, according to the Office for National Statistics.

Buyers may also be nervous about a possible fall in house prices, given the significant increase seen recently in the base rate. This has increased the cost of borrowing, with the Bank of England reporting that average mortgage interest rates have more than doubled this year.

Alternatively, investors could consider investing in property indirectly through a real estate investment trust (REIT). REITs are similar to funds but invest the money in a portfolio of property rather than shares.

Laith Khalaf, head of investment analysis at AJ Bell, comments: “REITs offer investors a convenient way of buying into the commercial property market, which can be held in a SIPP or ISA. The commercial property market spans office buildings, retail spaces such as shopping malls, and industrial units like warehouses and distribution hubs.”

However, Mr Khalaf also cautions: “While the price of the underlying commercial property assets might not be as volatile as shares, REITs trade on the market so they will be highly correlated with equities, which diminishes their ability to act as a diversifier.

“Commercial property is an asset which is clearly sensitive to economic developments, and will face challenging times as we enter an economic slowdown.”

5. Invest in a pension

Investors might also consider making a lump-sum contribution to their pension, which is a tax-effective way of saving for retirement. According to the HMRC, contributions to personal pensions hit a record high in the 2021 tax year, with an average contribution of £1,700 per person.

Alice Haine, personal finance analyst at Bestinvest, comments: “For those looking to save over the long-term, one of the savviest inflation-beating strategies involves increasing pension contributions.

“This is because money invested not only benefits from the beauty of compounding over the long term, but it also protects against income tax (which is rising) because tax relief is applied to your pension contributions at your highest rate of income tax.”

The level of tax relief depends on your rate of income tax (based on the current 2022-2023 tax year):

• If you do not currently pay tax, you can make an annual pension contribution of up to £2,880 into a pension, which the government tops up to £3,600

• If you’re a basic rate tax-payer, you can receive the same tax-relief of 20% from the government, up to 100% of your annual income (subject to certain conditions)

• Higher-rate and additional-rate tax-payers can receive tax relief of 40% and 45% respectively (subject to certain annual limits).

To illustrate the advantage of investing earlier, rather than later, in a pension, if you invested £20,000 in a pension with an annual return of 10%, it would be worth £52,000 after 10 years. However, it would increase to nearly £350,000 if you invested it for 30 years.

You can invest in a pension via a workplace scheme, as well as privately via a Self-Invested Personal Pension (SIPP).