How to invest if you’re aiming to buy your first house

Investors can need their savings for a number of reasons, whether it be for retirement, a house deposit, or putting money aside for children. Some of these goals may be decades away and here the investment strategy is straightforward, but knowing how to invest if the cash will be needed sooner is much more difficult.

Indeed, some people may have plans to use the money in three-to-five years, whether it be for a house deposit or for teenage children approaching university fees or a first car.

If this is the case, balancing risk is crucial, according to experts, who said that they need to combine a conservative portfolio choice while trying to still optimise returns.

Generally, investors are encouraged to take as long an investment outlook as possible because it allows them to smooth out the market volatility over time, Rob Morgan, chief analyst at Charles Stanley said.

“Three-to-five years is a tricky period as you probably don’t want to take on a lot of market risk and volatility over such as short time frame.”

Yet putting cash into a cash ISA is a poor choice at present with inflation so high, suggesting that investing remains the only game in town to not lose money in real terms. With this in mind, Trustnet asked experts which funds investors could consider adding to their ISAs if they may need the cash in medium-term.

BNY Mellon Sustainable Real Return

First was Morgan’s pick, the BNY Mellon Sustainable Real Return, which he chose because it aims to achieve a positive return on a rolling three-year basis. “Though that’s an aspiration, not a guarantee,” he said.

The £558m fund is a multi-asset product, with the majority currently invested in equities and the rest split between bonds, alternatives, cash and risk premia.

Morgan said that this “flexible” multi-asset approach “may appeal to investors looking for modest capital growth while aiming to control volatility.”

Indeed, a member of the IA Targeted Absolute return sector, these types of funds are a typical slow-and-steady option, rather than a get rich quick solution.

Managers Matthew Brown and Philip Shucksmith blend ‘core assets’, which are chosen to generate attractive long-term returns and more ‘stabilising’, lower-risk, holdings that act as hedging positions to dampen volatility and provide downside protection.

“Stock market falls should therefore affect the investment to a significantly lesser degree than pure equities, and over this sort of period there is a good chance of outpacing cash by a decent margin,” Morgan said.

The fund holds an FE fundinfo Crown rating of four and since it launched in 2018 and has made a total return of 24.8%, beating its benchmark and sector during that time.

Performance of fund vs sector and benchmark since launch

Source: FE Analytics

M&G Episode Income

Next up was M&G Episode Income, a fund that has held up well during the recent market sell-off. Indeed, over 12 months the fund has upheld a top-quartile ranking as well as 10 years, when it made a total return of 81.4%, the 12th best performance in the IA Mixed Investment 20-60% Shares sector.

Darius McDermott, managing director of FundCalibre, said that five years was not much time to take on a lot of risk, especially when “there have been many periods in history where stock markets have fallen and taken longer than three-to-five years to recover”.

Therefore, he said a multi-asset fund “was the best solution” to a shorter investment outlook.

The M&G Episode Income fund runs on a philosophy that assets revert to their fair value over time, even if, in the short-term, they are driven by external factors such as negative headlines or a lack of enthusiasm for particular sectors.

McDermott said: “The name ‘Episode’ refers to those periods of time when investors' emotions cause them to act irrationally. The managers use behavioural finance to find pockets of value and invest against the herd, rather than following it.”

Ruffer Total Return 

Andy Merricks, manager of the 8AM Focussed fund, said: “With so many serious risks swirling around the investment landscape at the moment it pays to stick with a ‘been there, done it’, approach offered by the Ruffer Total Return fund.”

Also a member of the IA Mixed Investment 20-60% Shares sector, the managers focus on capital preservation, something this fund has been able to do over the short and long term.

Indeed, since the start of this year the fund has made 3.5%, the second best returns in the sector. Over three, five and 10 years it has remained in the top-quartile, making 71% in the latter.

Performance of fund vs sector and benchmark over 10yrs

Source: FE Analytics

However, because of the nature of the fund investors should not expect “stunning returns from this fund”, Merricks said. “It’s not designed for that.”

While it is not a fund that will shoot the lights out, Merricks said its long-term track record has “demonstrated that it can cope with most of the risks that are thrown at it over most three-to-five-year periods,” although “no investment is without risk”.

Stick with cash

Investing with a shorter time horizon adds risk, something that AJ Bell’s head of investment analysis Laith Khalaf did not think was worth taking on.

He said with just a three-to-five year time horizon “you have little other option apart from cash, because market returns over such a short time period are just too unpredictable”.

He admitted that this still had it drawbacks, given how low interest rates still are historically and “high inflation makes them look even worse,” but still felt it was a better choice than going into markets for such a short amount of time.

“It’s simply not worth taking market risk over just a few years”.