The Best Low Risk Investments for 2024

Investment risk is a phenomenon in which the investor expecting returns bear losses due to a decline in the fair price of his or her security holdings like bonds, equities, real estate, etc. Here are some commonly used methods to measure investment risk:

• Standard deviation is a statistical measure that quantifies the volatility or variability of returns on investment. It indicates the difference between actual returns and the average return over a specific period. A higher standard deviation implies higher investment risk.

• Beta measures the sensitivity of an investment's returns to fluctuations in the overall market. If the beta is 1, it indicates that the investment's returns move in line with the market, greater than 1 suggests higher volatility than the market, and less than 1 indicates lower volatility.

• Value at risk (VaR) is a technique to estimate the maximum potential loss an investment portfolio could experience over a specific time period. It helps investors understand the downside risk they might face.

• Risk-reward ratios such as the Sharpe ratio and the Sortino ratio compare the potential return on investment with its associated risk. These ratios help assess the risk-adjusted performance of an investment by considering the returns earned relative to the level of risk taken.

• Stress testing involves simulating the performance of an investment under extreme or adverse market conditions. It helps assess the vulnerability of investment to severe market shocks and provides insights into potential losses.

It's important to note that no single measure can capture all aspects of investment risk and different measures are used for different types of investments.

Investors often consider a combination of these measures and other qualitative factors to assess and manage investment risk effectively.

In simple terms, saving is putting the money (that you don’t need right now) in a safe place, like a savings account, and accessing it later when you do need it. There are different types of savings accounts, some of which provide a decent interest rate, however, the core objective of saving is not building wealth, but rather, capital preservation and liquidity.

These are low-risk options providing stability and security for your money, helping you achieve short-term financial goals while building a safety net for unexpected expenses.

Investing is another format of financial planning that revolves around setting money aside for the future, though the intent and approach differ from saving.

While saving focuses on preserving capital and providing liquidity, investing aims to grow wealth over the long term by putting money into assets that have the potential to generate returns.

As such, investing is a deliberate decision to allocate funds to financial instruments or assets that have an inherent level of risk.

The potential for higher returns in investing comes with the understanding that there is also a possibility of underperformance, leading to capital loss.

Different investment options carry varying degrees of risk and it’s important for investors to assess their risk tolerance and diversify their portfolios accordingly.

Here’s a breakdown of the investment options we cover below, along with some important information that you can use for quick comparisons.

Note that, while low-risk investments generally have lower volatility and a reduced risk of capital loss compared to higher-risk options, the average returns of these investments can still be speculative and vary significantly.

Money market funds are mutual funds that invest in short-term debt, bought by corporations, governments, and financial institutions with solid financial standings.

The Money market fund is also known as a short-term debt fund because it encapsulates financial instruments having a maturity of less than a year.

In exchange for holding these securities, investors receive a modest interest payment.

Since money market funds observe investments in highly liquid and near-term instruments, they are considered less susceptible to volatility and uncertainties, which amounts to overall stability and reduced risk.

At the same time, it also makes them less likely to generate high returns, which is why money market funds are more often used to preserve capital and provide liquidity rather than to grow wealth.

Moreover, investing in money market funds provides higher diversification than simply holding cash in a bank account. It’s common for investors who are not sure where they want to invest for the long-term, to temporarily put their assets into money market funds.

Government bonds, commonly known as gilts, are another type of low-risk investment option. Unlike money market funds that invest in short-term debt securities, government bonds are long-term debt instruments issued by governments to raise capital.

Investors loan money to the government in return for getting paid periodically at a certain rate of interest. The interest payments, called coupons, are paid for the duration of the bond life, and the investors get their initial investments back when the bond matures.

To put it simply, it’s like lending money to the government and getting paid interest for it.

This interest rate varies from one bond to the next. Gilts from governments of large economies, like the UK and the USA, who have never defaulted on their repayment obligations, are considered low risk, and yield low-interest rates.

Riskier bonds offer higher interest rates and a higher chance that your initial investment will not be returned.

Since these are backed by the government and provide a stable and predictable income, gilts are low-risk investment options, suitable for investors who seek consistent cash flows and value capital preservation over higher potential returns.

By including gilts in their portfolios, investors can mitigate risk and add stability to their overall investment strategy.

In addition to governments, some large corporations may also issue bonds to raise capital, which are known as corporate bonds.

Similar to government bonds, these represent a form of debt where investors lend money to the issuing corporation in exchange for regular interest payments and the return of the principal amount at maturity.

Corporate bonds are generally riskier than gilts because governments have the power to levy taxes and control monetary policy.

On the other hand, corporate bonds carry risks associated with the financial strength and creditworthiness of the issuing company, therefore, yielding higher returns.

Given their higher risk profile, corporate bonds are generally suitable for investors willing to take on some level of credit risk in exchange for potentially higher returns.

These bonds can be attractive to investors who want a balance between risk and reward, and have a thorough understanding of the financial health of the issuing company.

Annuities are low-risk investments specifically designed for investors who prioritise stable income and want to ensure financial security in retirement. Investing into, or more specifically, buying an annuity, is practically entering into a contractual agreement with an insurance company.

In exchange for a specific sum, the insurer guarantees to provide regular income payments to the investor over a specified period or for the rest of their life. In other words, it seems to be the safest investment option.

Moreover, annuities can protect investors against market volatility, as unlike most other investments, they are not directly affected by market fluctuations.

The only risks associated with annuities are the potential loss of purchasing power due to the long-term effects of inflation and the financial stability of the insurance company issuing them.

If your insurer becomes insolvent or unable to fulfil its contractual obligations, there is a risk that you may not receive their expected payments. This is why it’s crucial to choose a reputable and financially secure insurance company when purchasing an annuity.

While investing in stocks and shares is generally regarded as an investment of higher risk, preference shares offer investors a relatively safer option. This is because its owners enjoy certain advantages that mitigate risk, which holders or ordinary shares aren't privileged to.

When a company pays dividends, preference shareholders are entitled to receive their dividend payments before ordinary shareholders. This preference in dividend distribution provides a higher level of income stability for preference shareholders.

Furthermore, when companies issue preference shares, they commit to paying higher dividends to preference shareholders. As a result, in some cases, these dividends represent a higher cost for the company than the interest payments on corporate debt.

When this happens, it’s not uncommon for companies to buy back preference shares from their investors at a higher price than they were sold to save on future dividend payments.

Finally, in the event of liquidation, preference shareholders have priority in receiving their capital back over ordinary shareholders.

These features make preference shares a more secure investment option, as they offer a greater degree of protection for investors seeking stability and consistent income.

Besides buying preference shares, investing in dividend-paying stocks is another relatively safe, albeit slightly riskier, investment option.

What makes these stocks attractive to investors is that they can generate a higher yield than other low-risk options, while remaining comparatively more stable than other high-risk investments.

Dividend-paying stocks are part of many investors' portfolios because of their ability to generate a steady income and huge growth potential.

In the UK, there are several successful companies known for paying large dividends to their shareholders, which can be particularly enticing for income-focused investors.

On the other hand, these stocks are typically more affected by market volatility as compared to other investment options. Their value can fluctuate and potentially result in capital losses.

Moreover, dividend payments are not fixed and can be reduced or suspended by the company, affecting the steady income expected by investors.

Index funds are a popular investment option for individuals seeking a diversified and relatively low-risk approach to investing.

These funds aim to track the performance of a specific market index, such as the S&P 500 or the FTSE 100, by investing in a portfolio of stocks that mimic the index's composition.

For investors, these funds can provide broad market exposure and diversification, which can help mitigate the risk associated with investing in individual stocks.

Furthermore, maintaining an index fund is generally more cost-effective than actively managing a fund, which leads to higher net returns for investors over the long term.

Lastly, index funds have historically shown consistent returns over the long term, aligning with the overall performance of the market index they track. This can provide investors with a relatively stable and predictable investment option.

However, these are not completely risk-free and they do carry certain limitations. Index funds are passive investments, which means they are designed to replicate the performance of the underlying index rather than outperform it.

As a result, investors in index funds may miss out on potentially higher returns that active fund managers may be able to achieve through skilful stock selection and timing.

All in all, index funds are a low-risk investment option and a suitable choice for investors looking to gain broad market exposure, diversify their portfolio, and achieve consistent returns over the long term, with the potential to grow their wealth steadily.

Investing offers the potential for capital appreciation, allowing your initial investment to grow over time. By investing in assets such as stocks, bonds, mutual funds, or even businesses, you can accumulate significant wealth and can achieve your financial goals.

Many investment options provide opportunities for generating regular income. For instance, stocks can offer dividends, bonds can provide interest payments, and certain investment funds may distribute profits to investors.

This income can supplement your earnings from other sources and contribute to your overall financial well-being.

By investing in any form, individuals can potentially mitigate the negative effects of inflation. Investing in assets such as stocks, real estate, bonds, or inflation-protected securities can provide returns that outpace the inflation rate.

These investments have the potential to appreciate in value or generate income, allowing investors to maintain or increase their purchasing power over the long term.

Investing enables you to diversify your portfolio by spreading your investments across different asset classes, sectors, and geographic regions; thereby, reducing risk by not relying on a single investment or market.

If one investment underperforms, others may offset the losses, potentially leading to more stable and consistent returns. It’s important to note that diversification does not guarantee profits or protect against losses.

Some investments come with tax advantages that can optimise your overall tax situation. For example, certain retirement accounts and pension schemes provide tax-deferred or tax-free growth, allowing your investments to grow without any tax liabilities. These tax-advantaged accounts can help you maximise your savings and minimise your tax burden.

Investing plays a crucial role in long-term retirement planning. By investing consistently over time, you can harness the power of compounding returns. This means that your investment gains generate additional gains, accelerating your wealth accumulation.

Private pension schemes, like self-invested personal pensions, provide a structured way to invest for retirement and secure a steady income stream during your golden years.

Investing can facilitate the transfer of wealth to future generations. By making strategic investment decisions and accumulating wealth over time, you can create a legacy for your loved ones. Investments that appreciate in value, combined with proper estate planning, can provide a substantial inheritance or financial support for your beneficiaries.