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What are the safest investments in the UK?

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

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

However, 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. 

Before we jump in, remember these aren’t risk-free investments – they are simply less risky than other investments.  

Summary 

  • Low-risk investments may appeal to investors as they are assets less likely to lose value. 

  • They can also help diversify your investment portfolio. 

  • However, there are a lot of pros and cons to consider before investing. 

  • A financial adviser can guide you on how to invest based on your risk attitude and goals.  

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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. 

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. 

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 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. 

  • UK government and corporate bonds: UK bonds are expected to deliver annualised returns of around 4.4% to 5.4% over the next decade, according to Vanguard Investor. Corporate bonds tend to offer higher returns as these are seen as riskier.  

  • Index funds: Similar to ETFs, index funds are a collection of stocks, bonds, or securities. 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. With index funds, your returns can vary. 

  • Money market funds: Money market funds, which invest in cash, cash equivalents (liquid investment securities that can be converted into cash) and short-term debt, usually around a year or less, offer top rates of over 5%. 

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: 
  • An 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: Another benefit is that 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: 
  • Lower dividend yields: If you’re interested in income, ETFs aren’t the best option as they typically offer lower dividend yields compared to directly owning a stock as they track an index, sector or market.  

  • ETFs can be volatile: 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 and can be flexible when you buy or sell, this can backfire. For example, you may buy an ETF just after the price rises. One way to avoid this is by using a stop loss and limit order, which is when you activate an instruction to buy or sell a share when a set price is reached.  

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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, also 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 bonds do not have such an option, 

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

The advantages of bonds: 
  • Low risk: Investing in bonds, particularly gilts, is seen as a low-risk investing option. 

  • 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.   

The disadvantages of bonds: 
  • They have some risks: While these are low-risk investments, there is a risk inflation 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 will be less competitive compared to other investments, such as stocks and shares.  

  • You can’t access your money for a fixed amount of time: If you plan to invest in a bond, you should ensure you won’t need that money before the end of your investment period. 

  • Lack of transparency: If you buy a bond on the second market via a broker, they can sometimes charge more.  

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. It’s worth checking that any index fund is diversified and does not cover a specific area before investing. 

  • 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.   

  • More predictable returns: Index funds tend to offer more predictable returns over the long term and are typically less volatile. Index funds can also sometimes outperform active funds over the long term due to lower fees, although this is not guaranteed.   

  • 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:  
  • No flexibility: A big downside is there’s no flexibility, as index funds usually track a specific index. With an active fund, a manager can change the holdings and strategy. 

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

  • Slower gains: You may experience slower returns than other assets, so you should have a long-term view if you’re interested in index funds.  

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.  

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

  • Ideal for investors with a short-term view: If you’re investing without a long-term view, money market funds can be ideal if you’re looking for decent rates with 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? 

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.  

Get financial advice
We’ll find a professional perfectly matched to your needs. Getting started is easy, fast and free.

About the author
Lisa-Marie Voneshen is a Senior Content Writer at Unbiased. She is an award-winning journalist with nearly a decade of experience writing and editing content across various areas, including personal finance and investing.