What are the safest investments in the UK?

Instead of leaving your money sitting in your savings account with a poor interest rate, one way to boost your returns is by investing, whether in company shares, bonds, or funds.  

While the potential rewards may be tempting, all investments come with some level of risk. 

However, although returns aren’t guaranteed, there are low-risk ways to invest your money.

This article explores various low-risk investments, how they work, and the pros and cons you should consider. 

What is a low-risk investment? 

Low-risk investments are assets that are less likely to lose any value, making the likelihood of you losing all your money low. 

They are also less volatile, so there are unlikely to be big swings in asset value, and they are more liquid, so it’s easier to access your money.

Many investors pick lower-risk investments as they approach retirement and want to start drawing an income. It’s all about getting the right balance, and you may decide to choose a range of investments with different risk profiles.

The downside to low-risk investments is that they often generate lower returns than other, riskier investments and assets.  

Low-risk investments can offer a way to get better rates of return compared to a traditional savings account.

They can also help combat the impact of inflation on your cash.

But, whether investing is the best option depends on how much interest you can earn on a risk-free cash savings account.

Check what rates you could get on your cash in a savings account before you decide to invest.

What kind of returns can you expect with low-risk investments? 

The kind of returns you can expect will vary based on the low-risk investment you choose. 

While some may be more in line with fixed-rate accounts, others may offer you more, although this is not guaranteed. 

We’ll run through the anticipated returns below, but we must stress that past performance does not indicate future performance – and the value of your assets can rise and fall.

Exchange-traded funds (ETFs)

An ETF typically contains a collection of securities such as stocks or bonds.

There are different types of ETFs to suit a range of different risk appetites. Lower risk options include ETFs that focus on bonds or dividend-paying stocks.

Companies that pay dividends tend to be established companies where share prices are less volatile.

UK government and corporate bonds

UK bonds are expected to deliver annualised returns of around 4.3% to 5.3% over the next decade, according to Vanguard Investor.

Corporate bonds

Corporate bonds tend to offer higher returns as these are seen as riskier.

Index funds

Similar to ETFs, index funds are a collection of securities such as stocks and bonds.

They passively track the performance of a particular index, such as the S&P 500 or the FTSE 100, by investing in all stocks in the tracked index.

The risk of index funds varies depending on the index they track.

For example, a bond index tracker is lower risk than an equity index tracker.

Money market funds

Money market funds, which invest in cash equivalents (liquid investment securities that can be converted into cash) and short-term gilts and quality bonds, usually with terms of a year or less, are currently paying about 4%.

How do you invest in low-risk investments?

For some investments, such as government and corporate bonds, you can invest directly or via a bond fund. 

With index funds, money market funds and ETFs, you can invest via an online investment platform, which usually includes several fees, including buying and selling assets. 

With any investment, regardless of risk, you should always ensure you’re not paying high fees, as these can eat away at your long-term returns. 

Passive investments, such as most ETFs, have lower fees, while actively managed investments tend to attract higher ones.  

Before investing in anything, you should also understand your tax allowances and potential liabilities.

A financial adviser can ensure you take advantage of any tax allowances so you don’t pay more than you need to.  

You should also ensure you’re happy with the liquidity of any investments.

For example, if you anticipate needing easy access to your cash, you’ll need to consider how easy or difficult it will be to access your money and if you’ll incur any early withdrawal penalties.   

What are the pros and cons of low-risk investments? 

There are many advantages and disadvantages to consider before putting money into a low-risk investment. 

We’ll now delve into the pros and cons of the main low-risk investments, starting with ETFs.  

The advantages of ETFs: 

• Easy way to diversify: With an ETF, it’s easy and relatively cheap to diversify your investments, as they can include a range of assets such as shares and bonds and cover various countries and sectors.

• Easy to buy and sell: You can easily buy and sell ETFs like stocks and track the live price.

• Low fees: As ETFs generally track an index and aren’t usually managed by an experienced fund manager, they are relatively cheap to invest in.

• Visibility: Most ETFs will share their entire portfolio upfront, so you know exactly what you’re investing in, while all actively managed ones must publish their holdings daily.  

The disadvantages of ETFs: 

• Not strictly a low-risk investment: Your investment risk will depend on the underlying assets within the ETF. For example, a bond ETF is usually lower risk than an equity ETF.

• Volatility: If an ETF is more niche or specialist, the performance may be more volatile. If you’re concerned about this, it’s worth choosing an ETF that is diversified, so it covers various assets and sectors or an index.

• Live pricing can backfire: While you can see the live price of any ETFs, this can make it easier to react emotionally and buy or sell without sticking to your long-term investing plan. 

The pros and cons of government and corporate bonds 

Bonds are used by governments and companies to essentially borrow money from you on the basis that they pay you back after a set period of time with interest. 

You can choose from a government or corporate bond.  

Government bonds, (those issued by the UK government are known as gilts) are low risk and are generally considered safer than corporate bonds, so you’ll likely get a lower rate in comparison.  

Corporate bonds are riskier as, unlike the government, which can take various measures to repay its bonds, such as by raising taxes, corporate bond issuers are companies so they do not have this option.

Now we’ll look at the pros and cons of investing in bonds.

The advantages of bonds: 

• Low risk: Investing in government bonds, also called gilts, is seen as a low-risk investing option. They are issued by stable governments such as the US and UK

• An easy way to diversify your portfolio: Investing in a bond can diversify your portfolio and mitigate some risk from other higher-risk investments you may hold.

• Regular income: Bonds issue coupons, the pre-agreed rate of annual interest you’ll receive, either once or twice a year. If you invest in bonds through a fund or ETF, any coupons will be automatically reinvested to help the fund to increase in value.   

The disadvantages of bonds: 

• Still some risks: While these are low-risk investments, there is a risk inflation and interest rates may impact your bond’s value, and the issuer may default on a payment or fail to pay you back. If interest rates rise when holding the bond, you may miss out on higher returns.

• Returns are low: The flip side to bonds being low risk is that your returns may be less competitive compared to other investments, such as stocks.

• Lack of transparency: If you buy bonds directly, rather than through a fund or ETF. Most bonds are traded on the secondary market after they are issued, rather than on a public exchange where real-time pricing is visible. This means you may not have as much transparency on the bond price and broker fees when you buy bonds.

The pros and cons of index funds 

As we mentioned, index funds are a collection of stocks, bonds or securities that aim to track a stock market or index. 

While index funds are similar to ETFs, they are usually restricted to one sale a day, while ETFs can be bought and sold many times.  

Here are the pros and cons of index funds. 

The advantages of index funds:  

• Easy diversification: As index funds can include a range of assets such as stocks and bonds, it’s an easy way to diversify your portfolio and lower your overall risk. Check that any index fund is diversified and you understand what it invests in before you buy.

• Low fees: Index funds benefit from low fees as they’re usually passively managed. If a fund is actively managed, the expert in charge will try to beat the benchmark instead of match it, and you’ll incur higher fees, which can impact your returns.

• Visibility: As index funds tend to track a specific index, you have transparency about the assets and better understand the pros and cons of your investment. 

The disadvantages of index funds:  

• Not necessarily low risk: Your investing risk will depend on the underlying assets in the index fund. Bonds are generally less volatile and therefore less risky than equities, but may provide lower returns.

• No outperformance: You can’t outperform a specific benchmark as an index fund only tracks an index instead of aiming to beat it.

• No flexibility: Index funds usually track a specific index. Whereas, with an active fund, a manager can change the holdings and strategy.

The pros and cons of money market funds 

As mentioned, money market funds invest in cash, cash equivalents and short-term debt. 

Money market funds offer a way of getting a slightly higher return compared to cash, with low risk and high stability, although the value of your investment can still rise and fall. 

We’ll reveal the pros and cons of money market funds.  

The advantages of money market funds: 

• Potentially better returns: You may get better returns than traditional bank accounts with low risk, although right now savings accounts are paying similar rates so compare before you decide.

• Low risk: As money market funds invest in short-term, highly liquid assets such as government bonds, you won’t be exposed to much risk compared to other investments

• Ideal for investors with a short-term view: If you’re investing for less than 5 years, money market funds can be ideal for decent rates on short-term assets.

The disadvantages of money market funds: 

• No protection: Your money is at risk as investments in a money market fund are not protected by the Financial Services Compensation Scheme (FSCS).

• No set interest rate: Interest rates for money market funds are variable, so they can rise and fall, meaning your investments can lose value. You’ll also need to be wary of the impact of inflation, which can impact your returns.

• Minimal capital appreciation: As money market funds are short-term, you won’t get a high capital appreciation (a rise in the value of assets).

Need help with your investment strategy? 

Exploring low-risk investments can be an effective strategy to enhance your savings returns, but navigating these options requires careful consideration.

While the risks are lower than other investment types, factors like inflation, fees, liquidity, and market conditions can still significantly impact your returns.

Unbiased can quickly connect you with a financial adviser regulated by the Financial Conduct Authority, who can help you build an investment portfolio for your financial goals.