Best Low-Risk Investments For Australians (2024)

Low-risk investments are financial assets that offer a stable return with minimal potential for loss of the principal amount invested. In Australia, these investments typically appeal to conservative investors who prioritise capital preservation over high returns.

Understanding what constitutes a ‘low-risk’ investment involves looking at several factors. These include the investment’s volatility, the issuing entity’s creditworthiness, and the time frame for investment. Generally, low-risk investments are characterised by less fluctuation in value and a lower chance of losing the initial investment.

Standard low-risk investment options for Australians include high-interest savings accounts, term deposits, and government bonds. These are considered low risk because they are backed by stable institutions or, in the case of government bonds, by the Australian Government itself.

While low-risk investments usually offer lower returns than higher-risk options like stocks, they play a crucial role in a diversified investment portfolio. They can provide a steady income stream and safeguard against market volatility, ensuring that part of an investor’s capital is protected.

It is also important to note that ‘low risk’ does not mean ‘no risk’. Even the safest investments carry some risks, such as the risk of inflation outpacing returns or the risk of interest rate changes affecting fixed-rate investments.

There are many options for Australian investors looking for low-risk investments. Let’s explore some of the options:

High-Interest Savings Accounts

High-interest savings accounts are a cornerstone of low-risk investment strategies in Australia. They offer a modest interest rate, higher-than-regular checking accounts, and the security of capital. These accounts are often used for emergency funds or savings for short-term goals. The Australian Government guarantees deposits up to a certain amount in approved banks, building societies, and credit unions through the Financial Claims Scheme, adding an extra layer of security for investors.

Term Deposits

Term deposits are another popular low-risk investment in Australia. Investors deposit a lump sum of money for a fixed period, ranging from one month to several years, and earn a predetermined interest rate. The interest rate is usually higher than that of a savings account. It is guaranteed for the deposit term, providing a reliable return. Early withdrawal of the funds often incurs a penalty, which helps investors avoid unnecessary disruptions to their investment plan.

Australian Government Bonds

Investing in bonds issued by the Australian Government is considered one of the safest options. These bonds provide regular interest payments and return the principal at maturity. The risk of default is extremely low, as the government backs them. Various types of Government bonds are available, including Treasury Bonds, which are long-term investments, and Treasury-indexed bonds, which protect against inflation.

Exchange-Traded Funds (ETFs) for Fixed Income

Fixed-income ETFs allow investors to invest in a diversified portfolio of bonds through a single transaction. These ETFs can include government, corporate, or other types of bonds and are managed to provide a steady income stream with low risk. They are traded on the Australian Securities Exchange (ASX), offering liquidity and ease of investment, appealing to individual investors.

Annuities

Annuities are insurance products that can provide a steady income stream for a set period or the lifetime of the investor. In Australia, insurance companies offer annuities and can be tailored to an investor’s needs. They are considered low-risk because they provide guaranteed payments. However, the return on annuities depends on the terms of the contract and may be lower compared to other investments.

Defensive Managed Funds

Defensive managed funds are designed to provide stable returns with low volatility. They typically invest in a mix of defensive assets, such as high-quality bonds and cash. These funds are professionally managed, which can be advantageous for investors who prefer a hands-off approach to their low-risk investments.

Each investment option has its benefits and risks, and what is ‘best’ can vary depending on individual circ*mstances. When choosing among these low-risk investment options, Australians should consider their investment time horizon, income needs, and risk tolerance. Consulting with a financial advisor can provide personalised advice to help make informed decisions.

Australian Government Bonds are widely regarded as one of the safest investment options in the country. These bonds are loans that investors make to the Government, which promises to pay back the principal amount on a specified date, along with periodic interest payments.

One of the reasons why Government bonds are considered safe is due to the extremely low risk of the Australian Government defaulting on its debt. Australia’s economic stability and sovereign credit rating give investors confidence in the Government’s ability to meet its financial obligations. Moreover, the income from Australian Government Bonds is predictable, providing investors with a fixed interest rate that is paid semi-annually until the bond reaches its maturity.

While the returns on Australian Government Bonds may not compete with the potential gains from the stock market, they generally offer a comparable yield to savings accounts, with the huge benefit of being locked in for the bond period (up to 15 years).

The interest rate on these bonds reflects the government’s creditworthiness and the investment term’s length. Generally, longer-term bonds offer higher yields to compensate investors for locking away their capital for an extended period.

Inflation, which is the gradual increase in prices and the corresponding decrease in the purchasing power of money over time, can affect the ‘real’ return on investments, especially low-risk investments. To address this, the Australian government also offers Treasury-indexed bonds. These bonds provide a return linked to the Consumer Price Index (CPI), ensuring that the investment’s value is maintained in real terms: as the cash rate rises so does the interest payments.

Treasury-indexed bonds are attractive for those concerned about inflation eroding their returns, especially in Australia’s current high-inflation environment.

Investors looking for the safest investment with the highest possible return within conservative assets often turn to Australian Government Bonds. They offer a compelling mix of safety, stability, and relatively attractive returns, making them a staple in the portfolios of risk-averse investors and those seeking a secure income stream.

Additionally, these bonds’ liquidity adds to their appeal. They can be bought and sold on the secondary market, giving investors flexibility should their circ*mstances change.

While no investment is entirely risk-free, Australian Government Bonds offer a highly sought-after level of security and returns that are often seen as more favourable than other low-risk investments.

When exploring low-risk investments, Australians should consider the following:

• Investment 0bjectives: Clarify whether you aim to protect your initial investment, generate income, or save for a near-term financial goal.
• Time period: Align your investment choices with your time frame. Short-term goals benefit from the liquidity of savings accounts, whereas bonds or annuities better serve long-term goals.
• Inflation risk: Assess whether your investment will keep pace with inflation to maintain the purchasing power of your capital over time.
• Interest rate environment: Understand that the current interest rate environment influences the returns on low-risk investments like savings accounts and bonds.
• Diversification: Even within low-risk investments, diversify across different asset classes to mitigate risk and potentially enhance returns.
• Liquidity needs: Evaluate how quickly you can convert your investment into cash. Some assets may have penalties or limitations on access to funds.
• Costs and fees: Be aware of any charges or fees associated with particular investments, as they can reduce your overall return.
• Tax implications: Consider the tax treatment of your investment income, as it can affect the net return on your investment.
• Financial Advice: It’s advisable to consult a financial advisor to tailor investment choices to your circ*mstances, risk tolerance, and financial goals.

These considerations will help ensure that your low-risk investments are secure and effective in meeting your financial aspirations.

The advice and information provided by ForbesAdvisor is general in nature and is not intended to replace independent financial advice. ForbesAdvisor encourages readers to seek expert advice in relation to their own financial decisions and investments.