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.

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

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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:

Haynes likes the Aberdeen Short Dated Enhanced Income.

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.

His fund will blend government securities, investment grade and high-yield bonds, depending on where the best value is to be found.

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