Unit and Investment Trusts: Growth funds for long-distance investors

Two experts tell Anthony Bailey how they would build a nest egg

People who do not need an immediate income from their investments are usually advised to invest for growth to get a real rate of return above inflation.

This means putting your money where the return comes predominantly from the rising value of the investments.

To some extent almost any investment can be used to build up a nest egg as it is always possible to reinvest any income from dividends and interest. But income tax is usually payable on dividends and interest unless you invest through a personal equity plan (PEP), which means the first pounds 6,000 of capital gains each tax year is tax free.

More importantly, managers of unit and investment trust funds who concentrate on growth tend to look for areas of economic activity where the demand for goods and services is likely to increase.

As a rule, investing in these growth areas involves a higher risk. You can dilute that by investing in more than one fund, perhaps putting pounds 30 to pounds 50 a month in each trust.

Someone with a lump sum to invest can spread the money across a range of funds more easily. Tim Cockerill, of Whitechurch Securities, says he would put up to 60 per cent of an investor's lump sum into UK funds.

"The rest of the money would go into the Far East, Japan, America and Europe," he says. "This is to take advantage of the growth in overseas markets and to diversify the portfolio, bearing in mind that there will be times when the UK will not be doing so well.

"I would pick three funds for the UK, so that you can spread your money. Fidelity UK Growth would be the core fund, with two other higher-risk funds offering the chance of greater return. Schroder UK Enterprise has been very successful with a concentrated portfolio of about 40 stocks, predominantly blue chip at the moment. I would also go for a smaller companies fund like Credit Suisse UK Smaller Companies."

After that, he would advise investors to put pounds 2,000 to pounds 3,000 in a range of unit trusts: "Schroder Pacific Growth has a very good record. It invests in the Far East excluding Japan. For a separate Japanese fund I would go for Martin Currie Japan. You cannot ignore America. Morgan Grenfell American Growth or Lazard North America Growth would be funds to choose.

"In Europe I would go for a conservative fund, such as Credit Suisse European. Clients who want to take a higher risk could put a small amount of money in emerging markets. I like Morgan Grenfell's new Global Emerging Markets Dublin-based fund."

This principle of diversifying risk across the globe is also followed by Mark Searle, of Gerrard Vivian Gray Asset Management. Mr Searle particularly likes the Credit Suisse UK Smaller Companies, Invesco European Smaller Companies and Fidelity Asean unit trusts.

The Fidelity fund excludes Hong Kong, Taiwan and Korea but covers what is probably the fastest-growing economic bloc in the region, the Philippines, Indonesia, Malaysia, Singapore and in due course Vietnam.

But these three funds on their own would not be seen as a balanced portfolio and would not be recommended for people who have, say, pounds 5,000 to invest.

In that case Mr Searle would choose one fund from each broad category.