Building a balanced and diversified investment portfolio is the gold standard for investors. It’s important to consider investing in a range of different funds in your Stocks and shares ISA. Here, I take a look at why I’m planning to add FTSE 250 index funds and FTSE Small Cap funds to my investment portfolio.
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What are the FTSE 250 and FTSE Small Cap index?
The FTSE 250 is a share index listed on the London stock exchange. It’s an index for medium-sized companies – sometimes called ‘mid-cap’ companies. The largest 100 UK companies are part of the FTSE 100, and the 101st to the 350th largest UK companies are part of the FTSE 250.
The FTSE Small Cap index is for listed companies that are smaller than companies listed in the FTSE 100 or FTSE 250. It contains the 351st to the 619th largest companies in the UK. The small cap index still includes some household names like Saga, Bloomsbury Publishing and Topps Tiles.
Why am I investing in FTSE 250 funds?
I like to aim for a diversified stocks and shares ISA investment portfolio. That’s why I invest in a mixture of different types of funds and geographies. Investing in funds rather than individual shares means I won’t lose much money if one company goes under or the share price crashes due to financial problems.
Historically, smaller and mid-sized companies tend to perform better than larger companies on average. That’s because smaller companies often have more potential to grow faster in the future than larger companies, which may be at the top of their growth cycle.
Smaller and mid-sized companies may be newer than larger companies and therefore may be expanding more quickly. Investors who buy shares in newer companies have the potential to see their investments increase in value if those companies are successful in the future.
Of course, historic performance isn’t a guarantee of future growth. However, here are some stats showing how much the FTSE 250 and Small Cap index have outperformed the FTSE 100 in recent years.
In the last five years, the FTSE 100 has grown by only 5.1%. Over the same period, the FTSE 250 has gained by 18.7% and the FTSE Small Cap index has increased by 36.4%. That means £10,000 invested in the FTSE 100 five years ago would now be worth £10,510. In contrast, £10,000 invested in the FTSE 250 five years ago would now be worth £11,870, and the same amount invested in the Small Cap index five years ago would now be worth £13,640. Not a bad return for your investment!
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How can you invest in FTSE 250 index funds with your stocks and shares ISA?
Most experts suggested aiming for a range of different types of shares and investments in your portfolio. I usually aim to spread my investments between a mixture of FTSE 100, FTSE 250 and FTSE Small Cap companies, as well as investing in larger and smaller global equity funds. If you’re not sure where to start, then it’s worth getting some financial advice to help you understand your options.
If you want to invest in FTSE 250 or FTSE Small Cap funds as part of your stocks and shares ISA, then you have a few different investment options:
- FTSE 250 tracker fund: these funds are sometimes called passive income funds or index funds. They aim to track the whole of the FTSE 250 index rather than investing a few shares within the index.
- FTSE Small Cap tracker fund: these funds are also a type of passive income fund or index fund. They aim to track the whole of the Small Cap index rather than picking just a few shares.
- Managed small companies fund: many smaller companies funds are managed by fund managers. They pick the shares from companies they think will perform best in the future. You may pay higher fund fees than for a passive index fund that tracks the whole index.
- FTSE All Shares fund: this type of fund invests in the whole of the FTSE 100, FTSE 250 and FTSE Small Cap indexes.
If you’re ready to invest, then have a look at our top-rated stocks and shares ISAs to help you get started.
