The two funds I'd buy if I started investing with £1,000 today

Investing is the best way to grow your wealth over the long term. However, if you're just starting out, and you don't have a large sum to invest, the market can be a daunting and dangerous place. Indeed, if you're starting with just £1,000, you're very limited in what you can buy, and a well-diversified portfolio isn't practical when you include charges.

But this does not mean that you should avoid the markets altogether. There are plenty of funds out there with low minimum investment requirments that offer diversification and exposure to companies all over the world.

A mixed bag

The Vanguard LifeStrategy 60% Equity Fund is an excellent choice for both beginner and experienced investors alike. This fund is split between bonds and equities with targeted equity exposure of 60% and fixed income exposure of 40%. This mix offers a ready-made portfolio that should provide steady returns in most market environments.

One of the best qualities of this fund (aside from its diversification) is its low cost. Vanguard is the world leader in low-cost funds, and LifeStrategy is no different. It charges just 0.22% per annum.

Costs are execptionally important to consider when choosing where to invest. For example, if you invest £1,000 for 10 years, achieving a return of 7% per annum and paying fees of 1% per year, at the end of the decade you'll have a total of £1,780. On the other hand, if you only pay 0.22% in fees, your money will be worth £1,924 at the end of the period, an extra 8%. It really pays to keep an eye on fees.

As well as its low cost, the Vanguard offering is also internationally diversified. Some 19% is invested in Vanguard's Global Bond fund, while another 19% is invested in the fund house's global Developed World ex-UK Equity fund. Some15% is invested in the Vanguard FTSE UK All Share Index fund and the remainder is split between a broad selection of global equity funds and bond indexes.

So overall, if you're looking for a low-cost way to build an instant long-term portfolio, it ticks all the boxes.

Small-cap growth

Another fund that could be an excellent pick for any starter portfolio is the iShares MSCI UK Small Cap UCITS ETF. Over the long term, small-cap stocks tend to outperform their large-cap peers, although picking the market's best small-cap stocks is a tricky business.

Luckily, with the iShares offering, you don't need to worry about picking the best stocks as it holds a broad selection of equities. Top holdings include UK stalwarts such as Informa Plc, Rentokil Initial, Smith (DS) and Halma Plc.

This fund is slightly more expensive than the Vanguard offering with a total expense ratio of 0.58%. Nonetheless, higher returns more than make up for the higher cost. Since inception (2013), it has produced a total return of 262%. Over the same period, the Vanguard fund has returned around 54%.

When combined, the stability of large-cap global equities and bonds, combined with the rapid growth of small-caps make these two funds a powerful combination for investors. £1,000 invested equally in both five years ago would be worth £2,587 today, a total return of 159% excluding fees and dividends. Over the same period, the FTSE 100 has returned a rather dismal 22%.

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Rupert Hargreaves owns no share mentioned. The Motley Fool UK has recommended DS Smith and Halma. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

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