Low-risk investing guide
Less likely to lose value, low-risk investments can make up part of a balanced portfolio.
Please remember, investment value can go up or down and you could get back less than you invest. The value of international investments may be affected by currency fluctuations which might reduce their value in sterling.
When it comes to investing, there’s no such thing as a risk-free investment.
However, for investors who might be new to trading or want to mitigate the potential risk, there are low-risk ways to invest money.
In this guide, we explore what makes an investment “low-risk”, and types of low-risk investments.
What is a low-risk investment?
It’s a fact that all investments carry some level of risk — but this is a scale, and some have more risk than others. No matter how sure a situation might seem, it’s important to take the time to understand the risk to ensure every investment is right for you.
On the lower-risk end of the scale, you have cash-like investments such as money market funds, gilts and some bonds.
Another element which brings a sense of security to low-risk investments is they have high liquidity. This means your investment is less likely to be affected by short-term price changes and you can more easily withdraw your money if you change your mind.
Low-risk investments generate lower returns than high-risk investments, typically over a longer period of time. But, having patience pays off. It’s possible that a steady, stable low-risk investment portfolio could bring you more returns than a high-risk portfolio over the same time period due to low volatility and incremental gains.
Why not save money instead of invest?
If you’re considering investing for the first time, a low-risk investment is a great way to get started without getting into high-stakes situations. But it’s reasonable to question if you should invest at all if the returns are low — why not put money into savings instead?
Put simply, investing and saving are not the same. Saving is when you put money aside for when you might need it later — such as for emergency funds, or just a rainy day. You might accrue interest over time, which - when rates are high - could be a competitive option when investments underperform. Whereas investing is when you specifically aim to grow the value of your money through an investment vehicle.
So, how do you know when you’re ready to start investing? Only you can decide when to take the leap, but it’s wise to make sure you’re comfortable with your finances - such as having 3 to 6 months of expenditure ready to respond to unknowns - and have met any savings goals first.
Things to remember for low-risk investing
Moving from the security of saving to the riskier task of investing can be daunting, but offers you potential to make your money grow further. Here are a few key things to keep in mind when getting started with low-risk investments:
- There is no such thing as a risk-free investment, and don’t let anyone convince you otherwise.
- Be prepared to lose all of your investment, regardless of risk.
- Low-risk investments rarely yield quick gains, so make sure you’re prepared to be in it for the long-haul as your investments grow slowly.
- Always check you are covered by the Financial Services Compensation Scheme (FSCS).
- Get independent financial advice from a professional if you are unsure or need help with low-risk investing.
- Consider diversifying your portfolio to include high and low-risk investments if and when you’re ready. This will come down to your appetite for risk — if you prefer to play it safer with exclusively low-risk investments, that’s okay too.
As with any investment, go through our checklist of important questions to ask yourself before you invest or read our guide to managing investment risk.
Most common low-risk investments
There are some investments which are considered much less risky than others, which often comes down to the asset type and the organisation issuing them. Your specific appetite for risk is something only you can decide, but here are the main low-risk investments you can get started with:
| Type of investment | What it involves | What makes it high-risk? |
| Money Market Funds (MMFs) | MMFs are funds invested in short-term debts held by companies with high-credit scores, offering a small amount of interest as a return. | As MMFs are short-term, they have low levels of volatility and are less likely to be affected by interest rates. |
| Certificate of Deposit (CD) | A certificate of deposit involves investing a lump sum with institutions such as banks and pension providers for a fixed amount period. Over this time, your CD will accrue interest rates that are typically higher than many savings accounts. | In a similar way to a regular savings account held with a bank, money in CDs is insured and protected. |
| Corporate Bonds and Government Bonds | There are two types of low-risk bonds - government bonds (also known as gilts in the UK), and corporate bonds. Bonds are loans that companies take out within financial markets. Investors buy bonds to lend money to these companies over a fixed period of time. Investors earn interest over this period and receive the issue price of the bond back at the end of the term. | Corporate bonds and gilts are issued by companies with high-credit ratings, so there is better reassurance about returns. These investments are essentially IOUs, so the company promises to pay you back the initial investment - though this isn’t an absolute guarantee. |
| Dividend-Paying Stocks | When you hold dividend-paying stocks, you become a company shareholder. Companies will regularly pay out part of their profits to their shareholders – this can differ in frequency, from monthly to yearly payments. | Not all companies that offer stocks pay out dividends, so those which do are likely doing so because they are stable and keen to keep their investors happy. |
How do you invest in low-risk investments?
After getting to grips with what low-risk investment types you might encounter, it’s time to focus on how you can begin to manage your investments with a level of risk that works for you.
Direct investing
Many investors like to have full visibility and control over their investments within a company. With direct investing, you can take a front row seat to understand the impact of your investment within a company and the journey it takes over time to bring you returns.
If this hands-on approach would be fulfilling for you, then you can invest directly with company stocks, corporate government bonds, or seek out a bond fund.
Self-managed investing
If you’ve got a keen interest in investing but aren’t fully confident in taking complete control of trading, a self-managed account could be a happy medium for you.
You’ll be responsible for researching potential investments, keeping an eye on the stock market, and making trades, but you’ll make your investments within the comfort of your own personal account rather than on the market directly.
Here are three main types of self-managed investments accounts:
- Trading account - invest in a wide range of investment types globally.
- Stocks and Shares ISA - invest up to £20,000 yearly and pay no tax on money you earn.
- Self-Invested Personal Pension (SIPP) - invest pension contributions to grow your retirement fund.
Managed investing
Investors who want to enjoy the rewards of low-risk investment without heavy involvement can benefit from a managed account.
The ii Managed ISA is ideal for beginners and investors who don’t want to commit lots of time to watching the stock market. To get started, you simply answer a few questions to share your goals, and let us know you want to focus on low-risk investments, so we can find a suitable investment portfolio for you. Once you’re set up, we’ll take care of the management and you can check in whenever you like to see how your investments are growing.
Low-risk investing mistakes to avoid
While low-risk investments are typically safer options, they still have the potential to go wrong. Here are four mistakes to avoid with low-risk investing:
1. Assuming that low-risk equals no risk
Be prepared to lose everything you put in, even if it feels like a ‘sure’ thing.
2. Setting unrealistic expectations on low-risk investments.
If you want high -returns, it might be worth considering a riskier alternative.
3. Not keeping an eye on your investment growth
Check in regularly to monitor whether your investment is beating inflation or saving interest rates by bringing you higher returns than your savings account would with the same amount of money. If it isn’t, you may need to reassess.
4. Withdrawing prematurely
Be patient! Low-risk investments are typically longer-term and take time to generate rewards.
Low-risk investing FAQs
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