What funds can be classed as low risk ?

learjet

Hi,

I'm keen to use my full £7200 ISA allowance but I'm very risk averse. My previous forays into funds and direct share ownership has been pretty disastrous so now I just tend to put £3600 into a cash ISA each year.

Is there a fund equivalent of a basic interest bearing account where your capital is not at risk ? I've seen mention of fixed interest securities and gilts but the jargon gets me down. If I go on the H&L site and look through the list of funds I'm totally confused by the terminology. Want I want is a safe fixed interest account but held in a S&S ISA. If anyone can give me some pointers I would be grateful.

Thanks

LJ

LongTermLurker

learjet wrote: »

Hi,

I'm keen to use my full £7200 ISA allowance but I'm very risk averse. My previous forays into funds and direct share ownership has been pretty disastrous so now I just tend to put £3600 into a cash ISA each year.

Is there a fund equivalent of a basic interest bearing account where your capital is not at risk ? I've seen mention of fixed interest securities and gilts but the jargon gets me down. If I go on the H&L site and look through the list of funds I'm totally confused by the terminology. Want I want is a safe fixed interest account but held in a S&S ISA. If anyone can give me some pointers I would be grateful.

Thanks

LJ

There are no investments (to my knowledge) where capital is protected - except for Guaranteed Equity Bonds, but the concensus of opinion on this site is that they are a poor option.

"Fixed Interest" is a term that refers to Bonds, and Bonds are loans to companies (as opposed to shares, where you own part of the company). I believe Bond holders have priority in claims against a company's assets if they go into liquidation, but there may not be enough to pay back the original loan. "Gilts" are Government bonds, and assuming the UK Government doesn't default on their IOUs, it's a safe bet that they'll repay the debt.

Funds that contain bonds are deemed low risk, because they hold lots of different bonds and all the fundholders share the risk, so if one bond is lost, you only lose a very small part of your capital.

Other lower-risk funds include Blackrock UK Absolute Alpha, which can use a technique called Shorting to buy shares that they think will go down in price; the principle is "I'll sell you some shares next month at 70p (and I hope to buy them in 3 weeks time at 60p)"

So, Gilts have the lowest riskof capital loss, quality corporate bonds are slightly riskier, High Yield bonds (high interest = higher chance of default) come next and equities (including BR Abs Alpha) start going up the risk scale from there.

Bear in mind 2 things:

1. The lower the risk of loss, the lower the opportunity to gain
2. Low risk is NOT the same as NO risk - only cash deposits offer the option for no risk to capital

There are other types of risk as well as capital loss, but I'll ignore them for now. Also, still think of bond funds as being longer term holdings. HTH

cheerfulcat

learjet wrote: »

Want I want is a safe fixed interest account but held in a S&S ISA. If anyone can give me some pointers I would be grateful.

You can buy individual gilts if they are medium dated or longer ( at least five years to maturity ). If held to maturity your returns are known and practically guaranteed - as LTL writes, the UK government is unlikely to default on its loans. If you buy at less than face value, there's even a bit of capital gain.

More on Incademy and Fixed Income Investor. The latter also gives information on current prices and yields.

kingmonkey

Is it a waste of time to hold gilts in an ISA?


There are also NS&I index linked & fixed interest savings certificates and Premium Bonds. Where there is no risk to capital (other than inflation risk).

cheerfulcat

Kingmonkey, the OP was looking for low-risk investments for a stocks and shares ISA. Out of interest, why do you think gilts in an ISA might be a waste of time?

Aegis

kingmonkey wrote: »

Is it a waste of time to hold gilts in an ISA?


There are also NS&I index linked & fixed interest savings certificates and Premium Bonds. Where there is no risk to capital (other than inflation risk).

You won't have to pay tax on the income you receive from gilts if you hold them in an ISA, so yes, it is worthwhile if you want to invest in them and have nothing else that you'd prefer to keep tax free..

baby_boomer

Low risk funds + high charges = guaranteed poor returns even in an ISA.

For a basic rate taxpayer, you can get 3 year net returns of 5.6%+ just from cash outside an ISA.

That's totally risk free and beats inflation.

An alternative is three / five year index linked tax free certificates. I put my partner into these a few months ago on account of her scraping into the higher rate tax bracket and they are looking a very sound choice both now and going forward.

jamesd

You might consider offshore cash funds that pay dividends instead of interest. One example is the S&W Cash Trust. With only 22.5% tax to pay (after the 10% tax credit is allowed for) instead of 40% it may beat various onshore cash options. Probably not enough to beat 10% before tax, though.

Basic rate tax payers might also find these offshore cash funds useful once their ISA allowances are used, since there's no further tax to pay provide they stay at basic rate after checking the effect of the dividend on their income. That makes an offshore 5.25% dividend worth the equivalent of 6.56% from an onshore savings account.

Inside a stocks and shares ISA the extra tax won't be required but the 10% tax paid on the dividends before you get them can't be reclaimed either, so the ISA isn't quite tax free.

I don't know whether Hargreaves Lansdown offer this fund, but they probably could obtain it for you if desired.

Cru Investment Portfolio seems to be very stable and has been doing better than cash.

Hargreaves Lansdown also offers a fixed rate cash deal for a six month term in a stocks and shares ISA at the moment.

earlgrey_3

LongTermLurker wrote: »

Other lower-risk funds include Blackrock UK Absolute Alpha,

I notice Blackrock Absolute Alpha has uncharacteristicaly lost value every day since the beginning of this month, now 2% down. Better than the FTSE All share's 3.5% but interesting.

learjet

Thanks for all the helpful replies and links to other sources.

I've actually quite enjoyed reading up on Bonds on the Incademy site (thanks Cheerfulcat) and certainly have a better understanding of them now.

Still undecided on what to do though so will probably post again for advice.

Thanks

LJ

turbobob

Just an observation but you have said you are looking for low risk funds but then describe yourself as very risk averse. Low risk and no risk are two quite different things.