Best Low-Risk Uk Funds For Conservative Investors

Low-risk investments are a great way to grow your money faster than a traditional savings account without risking too much. They are ideal for risk-averse individuals who want to grow their money. However, it's important to remember that even low-risk investments carry some danger of loss. Here are some of the best low-risk investment options in the UK:

- Money market funds: These invest in short-term debt from governments, banks, and companies with strong balance sheets. They offer slightly higher returns than cash deposits and are a stable, low-risk option.

- Bonds: UK government bonds, also known as gilts, are considered one of the safest forms of investment. They offer a fixed interest rate for maturity periods ranging from 2 to 30 years. Corporate bonds are similar but carry a higher risk as they are underwritten by the issuing company.

- High-interest current accounts: These accounts can provide higher returns than traditional savings accounts, but it's important to shop around for the best rates.

- Exchange-traded funds (ETFs): ETFs offer an easy and relatively cheap way to diversify your investments, as they include a range of assets such as shares and bonds across various countries and sectors.

- Index funds: Similar to ETFs, index funds are a collection of stocks, bonds, or securities that track a specific stock market index. They offer more predictable returns and lower fees but have less flexibility than ETFs.

- Savings accounts: Placing money in a savings account is a safe option, especially in the UK, where deposits are insured up to £85,000 by the Financial Services Compensation Scheme. However, the returns are typically very low.

Money market funds

In the UK, money market funds can provide a slightly higher return than traditional cash deposits or savings accounts. While the specific structure of each fund can vary, they generally aim to maintain a stable value per share, usually close to £1. This stability is achieved through careful management of the underlying assets, ensuring short durations and high credit quality.

However, it is important to remember that money market funds are not entirely risk-free. While they are designed to maintain a stable value, there is still a chance that the value of the fund could decrease, and investors may get back less than they invested. They are also not suitable for long-term savings growth, as the low returns may not keep up with inflation over time.

For investors seeking a place to "park" their money temporarily, money market funds can be a good option. They provide a low-risk avenue to hold savings while earning a modest return, which can be advantageous for those who are unsure about their long-term investment plans or are planning to spend their savings in the near future.

UK government bonds

The interest rate you receive depends on the bond. The riskier the bond, the higher the interest rate, which is coupled with an increased chance of not getting back your original investment. UK government bonds are considered low risk because the UK government has never defaulted on its repayment obligations.

You can buy UK gilts from the Debt Management Office, or via a stockbroker or bank using the Retail Purchase and Sale Service, although this would incur fees. It is also possible to invest in a large number of fixed-interest securities via investment funds and exchange-traded funds, typically via investment platforms and trading apps that specialise in holding bonds. Investing in bond funds via a stocks and shares individual savings account (ISA) provides a tax-exempt wrapper for your investments.

It is important to note that even low-risk investments carry some degree of risk. In the case of gilts, there is a secondary market on which they are bought and sold. However, if you redeem your bonds early, you must sell them at the going rate, which could be significantly less than your original investment. Therefore, it is possible to lose money if you redeem your bonds early.

Corporate bonds

The advantages of corporate bonds include the fact that they are a low-risk investment option, they provide a regular income in the form of coupon payments, and they can help to diversify an investment portfolio.

However, there are also some disadvantages to investing in corporate bonds. There is a risk that inflation may impact the value of the bond, and there is a chance that the issuer may default on a payment or fail to pay back the investor. If interest rates rise while holding the bond, the investor may miss out on higher returns. Corporate bonds also offer lower returns compared to other investments, such as stocks and shares. Additionally, investors typically cannot access their money for a fixed amount of time, and there is a lack of transparency when buying a bond on the secondary market via a broker.

When considering investing in corporate bonds, it is important to remember that all investments carry some degree of risk. It is always recommended to seek financial advice and conduct thorough research before investing.

Exchange-traded funds (ETFs)

ETFs are a collection of stocks, bonds, or securities. For example, Invesco's FTSE 100 UCITS ETF Acc, which tracks the FTSE 100, delivered a 7.69% return in 2023, only 0.23% lower than the index over the same period.

ETFs are easy to buy and sell, and they come with low fees as they generally track an index and are not managed by an experienced fund manager. Most ETFs will also share their entire portfolio upfront, so you know exactly what you're investing in.

However, it's important to note that ETFs typically offer lower dividend yields than directly owning a stock. Additionally, if an ETF is more niche or specialist, its performance may be more volatile.

Before investing in ETFs or any other financial product, it's crucial to understand your risk tolerance, financial goals, and investment horizon. It's also essential to consider the fees and tax implications associated with any investment. Consulting a financial advisor can help guide your investment decisions and ensure they align with your financial objectives and risk appetite.

Index funds

• Easy diversification: Index funds can include a range of assets, such as stocks and bonds, making it easy to diversify your portfolio and lower your overall risk.
• Low fees: Index funds are usually passively managed, which keeps fees low.
• More predictable returns: Index funds tend to offer more predictable returns over the long term and are typically less volatile.
• Visibility: As index funds track a specific index, you know exactly what you're investing in.

However, there are also some disadvantages to consider:

• No flexibility: Index funds lack flexibility as they are restricted to tracking a specific index.
• No outperformance: Index funds cannot outperform a specific benchmark as they only track an index instead of aiming to beat it.
• Slower gains: Index funds may experience slower returns than other assets, so they are more suitable for investors with a long-term view.

Frequently asked questions