Cash ISA Alternatives: Bond Funds and Low-Risk Options for Savers
The recent cuts to the Cash ISA allowance in the budget are a blow to dedicated savers. The government has also made it clear that it will close some of the loopholes, just in case investors were planning to use ‘cash like’ options in their Stocks & Shares ISAs. Nevertheless, the choice for investors is not cash versus a technology fund – there are options in between.
If money market funds are taken off the table for ISA investors, the reality is that you’re going to have to take some risk with your ISA allowance. There’s nothing that can replicate the liquidity in the security of cash based investments, but there are lower risk options.
Equally, encouraging people out of their Cash ISA holdings may not necessarily be a bad thing. Approximately half of all ISA holdings are held in cash, much of it at low interest rates, which leaves savers condemned to slow growth and poorly defended against inflation.
In order to persuade the public that they should be expanding their investment horizons, they need to be persuaded that there are investments which can defend their money. The average investor does not appreciate the damage that inflation can do to their capital savings.
He says that many investors neglect bond markets when looking for ISA options, and they are a natural choice for savers moving out of cash.
Government Bonds: The Safest Step Beyond Cash
The first potential option for a cautious investor may be a UK government bond or gilt. This is debt issued by the UK government, paying a specified interest rate, with the principle repaid after a set period of time. The only risk is that the UK government defaults, which has never happened. Interest rates are generally higher than cash savings. Investors will find a range of options on most major investment platforms.
Corporate Bonds: Higher Returns with Contractual Protection
From there, investors may look to corporate bonds – bonds issued by companies.
As Hart points out:
The fixed income sector is larger than the equity sector; corporate bonds are less volatile than stock markets and are contractually safer than equities…A corporate bond tends to be safer and less volatile than equity, as the bond holder has a contractual right to interest and principle payments before equity holders in any bankruptcy.
There is a wide range of credit funds investing in short-dated bonds with maturities greater than 90 days (less than 90 days is termed cash like). All with the capability of giving investors what they want, consistent ‘interest’ returns, with the ability to outperform inflation.
Haynes likes the Aberdeen Short Dated Enhanced Income.
It looks to provide liquid lower risk bond exposure while generating an attractive income higher than cash. The fund focuses on a portfolio of low duration global bonds and aims to have very low volatility and drawdowns. Another option is Artemis Short-Duration Strategic Bond, a flexible bond fund with focus on good quality, lower duration investment grade bonds, and limiting downside; a key objective.
Hart’s AI Tactical High Yield Bond fund invests in a portfolio of high yield bond funds, but uses some hedging to manage the volatility. This has helped smooth the return to investors over time, and it is another option for cautious investors moving out of cash.
Strategic Bond Funds: Diversified Income Solutions
Strategic bond funds will be another popular option. These tend to combine different types of bonds in a single portfolio. David Roberts, co-portfolio manager of the Nedgroup Investments Global Strategic Bond Fund, says it’s important for investors to know what they’re buying because fund managers will use the flexibility afforded to them in different ways, creating different risk and return profiles.
The Nedgroup fund is designed to be cautious.
Our view is a bond fund is bought as the foundation for a broader mandate. Often the “ballast” in a portfolio, throwing off income, but not expected to make high levels of capital gain.
His fund will blend government securities, investment grade and high-yield bonds, depending on where the best value is to be found.
As 2025 draws to a close, we have a “defensive” bias in our fund. We normally expect to have between 20 and 30% in high yield and associated assets. Today, that is close to 15% and we have a bias toward much better rated bonds. We are just over our average weighting to investment grade. Again, though, we are defensive with better quality, shorter maturity bonds - designed to protect should economies turn down. Both high yield and investment grade look expensive to their own histories but still offer solid income.
Multi-Asset Funds: Capital Growth with Downside Protection
If investors are prepared to take on a bit more risk, a defensively managed multi-asset fund such as Troy Trojan or Newton Real Return could be considered, says Haynes. Their focus is on capital growth rather than generating an income. They cannot be entirely immune from the ebb and flow of stock markets, but they have managed to minimise losses in difficult periods. The Troy Trojan fund, for example, dropped just 3.7% in 2022[1], when the wider MSCI World index fell 17.7%.[2] For investors who prefer Investment Trusts, Troy also manages the Personal Assets Investment Trust, which has a similar profile.[3]
There are a range of well-established multi-asset trusts from long-standing teams. The BNY Mellon multi-asset range, for example, has a range of options for different risk profiles and is low cost. The BNY Mellon multi-asset growth fund, the most high octane fund in the range, is first quartile in its sector over one and five years, fell just 3% in the tough markets of 2022, and has an ongoing charge of 0.7%
Any of these funds would have delivered you a far better return than cash over the past five years, but without the volatility of stock markets. While the cuts to Cash ISAs may feel a little mean today, they may turn out for the best in the longer term.
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[1] Trustnet
[2] MSCI World Index
[3] Trustnet
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