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Low-risk investments in the UK: the complete guide

All types of investments carry a degree of risk – some more than others. In this Moneyfarm blog, we delve into the various types of investment vehicles and the degree of risk associated with them. We also examine some low-risk investments you might like to consider adding to your portfolio.

What are some of the lower-risk investments in the UK?UK Government bonds, savings accounts, cash ISAs, ETFs, and index funds
Which low-risk investment is backed by the UK government?Gilts
Where do risk-averse investors invest money?In low-risk investments or diversified portfolios
Do low-risk investments in the UK generate high returns?No, lower-risk investments usually generate lower returns

Some of the low-risk investments in the UK include:

  • Bonds – corporate and government
  • Gold
  • High-interest current accounts
  • Real estate

When economic waters are choppy, it is even more important to be risk-aware when making investment decisions. This blog will help you steer a course towards the lesser risky investments in the UK.

Why not save money instead of investing it?

If you are risk-averse, you could be better off putting your money into savings accounts rather than investment funds. So, why, you ask, doesn’t everyone save rather than invest?

The answer is that not all people are risk-averse. If this is true in your case, you might be interested in the significantly higher returns you can get on investments, especially ones that are considered low risk.

The difference between saving and investing

If the concept of putting money away for future needs is new to you, you might think that saving and investing are the same things. However, they are not.

Saving is about putting money aside until you have a need for it. Investing, on the other hand (and in this, we include low-risk investing in the UK), means putting your money into an investment vehicle with the express aim of growing the value of your investment to buy or secure something in the future.

However, whereas money put into savings accounts is considered safe, investing money carries an element of risk. But what is risk?

The role that risk plays

In everyday life, risk refers to danger. However the risk element is often misunderstood when it comes to the financial world, especially concerning low-risk investments UK investors can opt for. This misunderstanding might lead you to make poor financial decisions.

Yes, risk is real, even with the best low-risk investments in the UK. However, according to a report published by the ONS in December 2023, the proportion of UK shares held by UK residents was 10.8%, while the proportion held by overseas investors was 57%. It’s hardly what you might call low-risk investments. So, why is that? What drives them to do so? Basically, it is understanding risk and being at peace with one’s risk profile, so let’s look at investment risk in more detail.

Investment risk explained

Although putting money into a cash savings account is considered safe, there is still some risk. In this instance, the risk is inflation.

Over time, inflation will devalue the money in ordinary savings accounts in terms of its real value when you eventually get around to spending it.

The higher the inflation rate and the longer money is left in cash savings accounts, the more it loses value. According to a report published in the Independent, nearly £366 billion is languishing in low-interest savings accounts here in the UK

However, low-risk investments in the UK can offer much better interest rates, and this higher return vis-à-vis inflation motivates people to invest.  However, it would be best if you never forgot that the value of investments could fall as well as rise. In a worst-case scenario, you could lose your investment entirely. This is why understanding investment risk is so important.

Let’s now take a look at some higher and lower-risk investments.

Higher versus lower-risk investments

As a general rule, low-risk investments are characterised by their stability and lower potential for loss. They are often considered safer because they are less susceptible to market fluctuations and economic downturns. Investors who prioritise capital preservation and consistent, albeit smaller, returns often gravitate towards these investment options.

On the other hand, high-risk investments are marked by their potential for substantial growth and higher returns. However, this comes with increased volatility and a greater chance of loss. These investments are more sensitive to market changes, economic conditions, and even geopolitical events. Investors drawn to high-risk options are typically looking for opportunities to maximise growth and are willing to accept the corresponding risks.

Also, equities (company shares) are considered higher risks because their value can fluctuate depending on the economy and the stock market. When the markets are volatile, this can happen alarmingly quickly.

The fundamental difference between low-risk investments in the UK and high risk lies in the trade-off between risk and reward. Low-risk investments offer more predictability and security but at the cost of limited growth potential. Conversely, high-risk investments provide the possibility of significant gains but require a higher tolerance for risk and uncertainty. This dichotomy shapes investment strategies and portfolio construction, guiding investors in aligning their choices with their financial goals, risk appetite, and long-term objectives.

The best low-risk funds in the UK come in the form of corporate bonds and government bonds.

UK government bonds, also known as “gilts,” are loans that investors make to the government. Due to being underwritten by the government, they are considered the safest forms of investment. When you invest your money in this asset class, the government pays you a fixed rate of interest until the bond matures.

Maturity periods are usually anywhere from 2 to 30 years, although the UK’s debt management office has recently released a gilt with a maturity span of 55 years. This is one of the problems with gilts. They tie your money up for long periods.

There is a secondary market on which gilts are bought and sold. But if you redeem your bonds early, you must sell them at the going rate. So, it could be significantly less than when you made your original investment.

In other words, although you might consider bonds traded on this market to be low-risk investments here in the UK, risk does enter the equation, and you could lose money. So, what you thought were low-risk investments in the UK in 2022 could end up being short-term high risks in 2023 or 2024.

But you might be interested to know that Moneyfarm has recently launched a Gilts below par Collection that focuses on UK government bonds or gilts that are currently trading under their par value and have a coupon rate of less than 1%.

Corporate low-risk bonds in the UK

Corporate bonds work much like government bonds. They are generally available in three categories: short–term (3 years), medium-term (5 to 10 years), and long-term (over 10 years).

Corporate bonds are underwritten by the companies issuing them – not the UK government, so the risk is higher. Typically, the riskier the company, the greater the yield; therein lies the difficulty. Are you prepared to risk more to gain more?

Corporate bonds may not be the best low-risk investments in the UK for those new to investing.

A bond-based ETF could be a better option to attain better short-term low-risk investment in UK corporate bonds.

How diversification can help to protect your investments

When you diversify your investment portfolio, you are, in effect, lengthening the odds of losing some or all of your money. For example, if you only invest in one company’s shares and that company goes bust, you could lose all the money you invested.

On the other hand, if your investment strategy is to buy shares in 10 different companies or more, the odds against two or three going bust at the same time are much longer. The chances of all of them going bust would be immense. Therefore, the more you diversify, the more you spread the risk.

You can take it even further and invest in companies in several different industries. Some sectors might remain stable or gain and balance out those that experience downturns.

ETFs are an excellent example of diversification because they can contain equities in many different companies in many different industries. That is why we mentioned Bond ETFs earlier as better low-risk investments for UK investors than individual bonds.

Alternatively, a stocks and shares ISA (also known as an investment ISA) is another good example of a high-return investment for UK investors, but some level of risk is involved.

What else can help to spread risk?

Another way to spread risk is to be prepared to leave your investment where it is long-term. It is generally accepted that stock markets are, at times, volatile places, but they do tend to recover value over time.

From an investor’s viewpoint, the trick is to ride out any crashes, which is why choosing the best-performing investment vehicles and taking a long-term view of your investment portfolio is key.

Should you choose high or low-risk investments?

If you are just about to start investing, the first thing you should do is review your personal financial situation. It’s essential that you sort out your short vs long-term financial needs. Once you’ve done that, you can then think about which investor profile suits you best.

Now comes the tricky part. Do you opt for high or low-risk investments in the UK?

High-return investments in the UK (or anywhere else, for that matter) tend to carry high risk. If you’ve sorted out your investor profile, you will have established how risk-averse you are. But even if your appetite for risk is relatively high and you are considering how to invest £100,000, it’s very unlikely you’ll sink it all into one product unless that product is a general investment account with no contribution limit. More on this in a moment.

Taking Advantage of personal savings allowances

One thing you need to consider when you are considering investing is the tax implications. Products like ISAs allow you to invest up to £20,000 per annum, tax-free. It means that when you stay within your personal ISA allowance, any growth in your investment will be free of capital gains tax, and any withdrawals will be free from income tax. Most people can, in addition, also invest up to £40,000 per annum into a SIPP.

But if you are talking about investing £100,000 or more in any one tax year and having used up your ISA and SIPP allowance, you will still be left with £20,000 or more. This balance can be put into a general investment account (GIA), as there is no annual limit on how much you can invest in this product.

Unlike an ISA or SIPP, a GIA is not a tax wrapper; you will pay income and capital gains tax. However, a GIA can comprise various investment portfolios – low-risk investments for UK investors or medium or high-risk. Also, you can invest in any type of product or sector. In other words, you get the advantages of diversification plus any long- and short-term investment benefits.

Last but not least, choose your product provider carefully. By doing so, management fees will have a minimum effect on profit; with Moneyfarm, the more you invest, the cheaper the fee.

Liquidity+

Moneyfarm has crafted Liquidity+, a state-of-the-art investment tool boasting a gross annualised yield of over 5.2%. It possesses a gentle risk profile, complemented by transparent, competitive charges. More than a mere low-risk asset encompassing bonds, CDs, and commercial paper, it’s a calculated method for short-term financial aspirations.

Capitalising on the rise in yields from recent rate changes, it provides a custom-tailored market entry speed. A fund with an annual yield above 5.2% mitigates risk, magnifying liquidity’s role through a well-thought-out solution. Liquidity+ has been designed to offer low-risk, high-return investments in the UK.

Conceived for a period of up to 2 years, Liquidity+ promises flexibility, sanctioning immediate fund movement into other Moneyfarm portfolios or withdrawals at any given time. Our Asset Allocation professionals hand-select the optimal money market funds for Liquidity+ and maintain a watchful eye on performance and risk, instituting essential revisions. Assistance is readily available to help discern Liquidity+’s function within a portfolio, ensuring it’s in tune with your financial goals and risk levels.

Continuous performance assessments ensure all investment benchmarks are effectively attained. With a clear-cut 0.3% management fee (VAT inclusive) + 0.1% for underlying funds, Liquidity+ not only presents competitive and transparent fees but also vouches for the highest standard of investment care. Though we say it ourselves, it’s one of the best low-risk investments in the UK.

FAQ

What is low-risk investing?

Low-risk investing means investing in assets with a lower chance of losing value, so you are less likely to lose everything if things go wrong. However, these types of investments generate lower returns.

Low-risk investments in the UK include UK government bonds, corporate bonds, ETFs, ​​fixed annuities, index funds, and money market mutual funds.

Why should I invest in low-risk investments in the UK?

Low-risk investments are for risk-averse individuals who want to invest and grow their money more quickly than a traditional savings account without risking too much or losing everything if their investments don’t do well. Low-risk investments are not the most effective option if you are looking to maximise your growth potential.

When should I buy low-risk investments?

You can buy low-risk investments when you want to diversify your portfolio or lower the risk of devastating losses.

Also, banks tend to lower their average savings account rate when the Bank of England reduces its benchmark interest rate. When this happens, lower-risk investments could potentially generate higher rates of return than traditional savings accounts with minimal risk.

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*Capital at risk. Tax treatment depends on your individual circumstances and may be subject to change in the future.