Some investment funds that describe themselves as ‘cautious’ still have a large proportion of their investments in shares, so make sure you’re not taking on more risk than you realise.
Even those that are heavily weighted towards lower risk investments such as bonds have failed to deliver recently, leaving many investors doubting that they are cautious at all.
Here, we explain what to watch out for when choosing a cautious fund, and why none of these funds are ever entirely risk-free.
How do you find out what your fund is invested in?
Hands up if you’d describe yourself as a cautious investor? For many people, it’s not that we don’t want to take a risk with our investments, rather that we want to know how much we could lose if it all goes wrong. Many investors in their 50s, 60s and beyond (both men and women) put their money into cautious funds which usually invest predominantly in bonds with just a small percentage invested in shares, believing it will give them some exposure to the stock market without taking on a lot of risk.
But some cautious funds have a much bigger chunk of their investment in shares than investors might be aware of. If you’ve invested money in a cautious fund it is relatively easy to find out the percentage of the fund that could be invested in shares.
- Go to the fund manager’s website. If you don’t know its address, type the name of the fund into Google.
- Once you’re on the fund management company’s website, look for the ‘fund factsheet’. This will show you a pie chart with the percentage invested in shares, cash and bonds and so on. If you have several investments – maybe because you’ve taken out stocks and shares ISAs with different companies over the years – you can find fund factsheets (along with a range of performance data) from a website called Trustnet.
- Ask your financial advisor. If you can’t find information about your funds directly and you invested in them after taking advice from an independent financial advisor, get in touch with them and ask them to clarify what you’ve invested in.
Are these funds suitable for a cautious investor?
Some advisors claim that if a fund has more than 25-30% of its investment in shares it’s not cautious, whilst others argue that they don’t actually reduce the risk that much.
It’s worth noting too that just because a fund is considered low risk, that doesn’t mean no risk is involved.
Most cautious funds went down by almost as much as the stock market in the credit crisis of 2008, and last year they also performed particularly badly for investors. That’s because of their usually heavy weighting towards bonds, the prices of which have fallen sharply following a series of interest rate increases to try to curb rampant inflation. When interest rates go up, new bonds are likely to be issued offering higher ‘coupon’ rates (this is the interest rate that indicates how much you will receive from your investment each year).
As a result, existing bonds look less attractive, which leads to their prices dropping. Conversely, bond prices rise when interest rates fall, as investors are willing to pay more for bonds offering higher interest payments.
A spokesman for investment platform interactive investor said: “The lesson for investors is that even safe bond funds can fall sharply over a short-term period when there is an unfavourable market backdrop, which has been the case for bonds because of rising interest rates. UK government bond funds or gilts are considered among the safest type of bond fund investors can buy – due to the fact that the issuer is the UK government, which has never failed to return to investors the amount they have loaned.
“But, due to interest rate rises, bond prices have fallen. In the case of UK government bonds, the yield – the income paid to investors – was very low. It was below 1% a year ago, so the price of such bonds were very expensive. As rates have risen, the fall in the bond price has been notable, as bonds re-priced.”
What to do if you’re in a cautious fund
- Contact your advisor or the bank that sold you the investment.
- Complain if you think you were given bad advice. If you said you wanted an investment that wouldn’t lose money, there’s a chance you were mis-sold. If you were given the wrong advice you may be able to get compensation.
- Complain to the Financial Ombudsman Service. If your complaint is rejected and you believe you were given bad advice you can take your complaint to the Financial Ombudsman Service. Learn more about this in our article How to complain about a financial company.
How to invest if you’re a cautious investor
While there are a number of pension funds that invest no more than 25% or 30% in shares, there are very few straight low risk ‘investment funds’ (the type that you can invest in through an ISA, for example) that have only a small proportion of money in shares. It means that you may have to build your own low risk portfolio. This is for guidance only, and you should get advice from an independent financial advisor about what’s suitable for you. As a guide you should:
- Make sure you have a good reserve of cash in savings accounts. Keep below the Financial Services Compensation Scheme (FSCS) limits so you’ll receive full compensation if the bank or building society were to go bust. You can find out more about the FSCS in our guide Are my savings safe?
- Add in government and company bonds: Company and government bonds (called ‘gilts’) are not risk free, as we’ve mentioned previously, but they are generally lower risk than shares and can provide a useful way of spreading your risk. Learn more about bonds in our article What are bonds and how do they work?
- Invest a limited percentage in shares. Shares are volatile investments and you cannot expect to invest in them without some ups and downs. Over the longer term (which is at least ten years) they can produce a higher return than savings accounts but you shouldn’t invest more than you feel comfortable.
You can find out more about investing and your approach to risk in our guides Investing – the basics and What’s your attitude to risk?
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