Understanding low risk investing

While the markets have delivered substantial returns over the past few years, the gains have not been without volatility. From the pandemic to Russia’s invasion of Ukraine, the collapse of Silicon Valley Bank and persistent inflationary pressures, low risk investing continues to appeal to those seeking to preserve capital while achieving modest returns.

This group tends to include new investors, those close to or in retirement, and individuals with shorter investment horizons — for example investing for a specific goal such as a house deposit. For them, capital preservation is of paramount importance, with the emphasis on stability over high returns. Or in other words, low risk investing.

Low risk investing involves allocating funds to assets that offer stable returns with minimal risk of loss. While no investment is completely risk free, these tend to be characterised by their predictability and relatively low levels of volatility. 

Common low risk assets include:

• Government bonds — debt securities issued by governments, considered low risk due to the issuer's creditworthiness
• High quality corporate bonds — issued by financially stable companies with strong credit ratings
• Low volatility index funds — designed to track stabler blue chip companies with a history of reasonable returns
• Dividend stocks — shares in companies with a history of consistent dividend payments
• Cash ISAs — ISA accounts which offer tax free interest on deposits, with a maximum deposit of £20,000 per year

UK government bonds

As of mid-2025, UK government bonds (otherwise known as gilts, as they used to be issued on gold-edged paper) are offering attractive yields which are currently slightly above annual CPI inflation. This makes them a common choice for low risk investors building a diversified portfolio.

The two most common types are:

• 10-Year Gilts — yields have risen to approximately 4.60%, up from 3.49% earlier in the year, reflecting investor concerns over fiscal policies and inflation expectations
• 30-Year Gilts — these long-term bonds have seen yields increase to a heady 5.4%, indicating a significant shift in investor sentiment towards longer-duration securities

Gilts are considered among the safest investments in the UK, as they are backed by the full faith and credit of the government. This means the risk of default is extremely low, especially compared to poorer countries, corporate bonds or equities.

These bonds are also highly liquid, so can easily bought or sold on the secondary market, which makes them a practical option for investors who may like some risk elsewhere in their portfolio. However, it’s worth noting that inflation-beating returns are rare, so this status quo may not last long — and the government debt and deficit position is arguably unsustainable.

You might also consider high quality corporate bonds, issued by blue chip public companies like Microsoft or Apple. These can offer higher returns, though will always be riskier than gilts simply because corporate risk will always be higher than government risk when the government in question is the issuer of the currency the bond is paid in.

Low volatility index funds

Low-volatility index funds are designed to reduce price fluctuations by investing in stocks which sport lower historical volatility. These funds are particularly appealing during periods of market uncertainty, or for investors who struggle emotionally with the normal ebbs and flows of the equities market.

For balance, it’s worth noting that the funds which offer lower volatility also tend to deliver lower but more regular returns over time. This trade-off is a natural feature, as the growth stocks which bring the largest gains are almost always highly volatile.

Two of the most popular low-volatility ETFs include the Invesco S&P 500 Low Volatility ETF and the iShares MSCI Min Vol Global ETF, both of which focus on stocks with stable earnings and reduced risk profiles.

These funds also offer diversification benefits and serve well as a defensive component in a low risk investment strategy, especially when paired with gilts.

Dividend stocks

Dividend-paying stocks are another common component of low risk investing, popular for their regular income, but also in many cases capital appreciation. These stocks tend to be well-established blue chip companies with stable cash flows and strong balance sheets, which helps to sustain consistent dividend payments even during economic downturns.

Some of the most popular dividend stocks reside in the FTSE 100, including Legal & General, British American Tobacco and National Grid. The key factor to consider is whether the company behind the stock offers a product or service with inelastic demand — or in other words, whether it will be in demand regardless of economic conditions. Insurance, tobacco and electricity arguably meet this definition, and these companies have dividend histories spanning decades or more.

For investors seeking dividend income within a diversified portfolio, common ETFs include the Vanguard Dividend Appreciation ETF, which invests in companies globally that have a proven track record of increasing dividends year over year, or the iShares UK Dividend UCITS ETF, which invests in the 50 highest-yielding stocks within the FTSE 350.

Investing in dividend stocks can help to increase income streams and offer some protection against inflation as dividend payers tend to be defensive by nature. However, it’s important to remember that dividends are not guaranteed and stock prices can fluctuate, so combining these stocks with other low-risk assets can create a more balanced portfolio.

Cash ISAs

Cash Individual Savings Accounts (ISAs) are popular with conservative investors seeking instant liquidity and capital preservation. You can save a maximum of £20,000 per year across all ISA accounts, with any interest, capital gains or dividends free of tax.

We offer leading rates of interest on uninvested cash in your Stocks & Shares ISA, allowing you to cover multiple investment types, including cash, in one account. However, IG research indicates that over the past 26 years, cash ISA savers have earned just one-seventh of the real returns of investors in UK equities.

Therefore, you may consider limiting your overall cash exposure, especially if investing over the longer-term — the nature of risk is multi-faceted, and while cash allows you to retain the principle, you may be unlikely to beat equity returns or preserve purchasing power over the longer term.

It's essential to consider any key terms and conditions with an ISA account. Importantly, ours is flexible, which means that you can withdraw money and replace it within the same tax year without affecting your annual ISA allowance. This added flexibility makes it easier to manage short-term cash needs while still taking full advantage of your tax free savings limit.

Building a diversified low risk portfolio with us

Constructing a diversified low risk portfolio involves balancing these various asset classes to mitigate risk while achieving steady returns.

A sample allocation might include:

• 40% in UK gilts or corporate bonds — providing stability and predictable income
• 30% in low volatility index funds — offers growth potential with reduced risk
• 20% in dividend stocks — generates regular income and the potential for capital appreciation
• 10% in cash savings — ensures liquidity and capital preservation

Regularly reviewing and rebalancing the portfolio is crucial to maintain alignment with investment goals and risk tolerance.

You can open your ISA account with the IG Invest App or our desktop platform here.