All investments are associated with risks. Yet, the risk is not uniform, and it’s essential to be aware of the different levels of risks linked with all types of investment instruments.
This is why the first thing to consider before investing is how much of a risk appetite has – how much risk one is willing to take.
Want to know the best investment options for risk-averse investors but still generate good returns? Continue reading this article to know more!
What is risk averse?
Risk-averse refers to an investor who chooses to preserve the capital over and above its potential to generate returns that are higher than the average. Risk can refer to many factors – volatility, currency, market, credit rating, etc.
Risk-averse can also refer to a conservative investor. Low risk symbolizes stability in investments. A low-risk investment generates guaranteed reasonable returns, if not outstanding, above benchmark returns. But chances are near zero that the principal investment amount will be lost. Whereas a high-risk investment option may gain or lose money over time.
Risk-averse investors are unwilling to accept market volatility. They prefer their investments to be highly liquid – readily available to be withdrawn. Such investors usually include old investors or retired individuals who depend on their savings for their daily expenses.
Is FD a good option for risk-averse investors?
One should constantly adjust their returns against the current inflation rate. The current Fixed Deposit interest rates are 5-7% p.a. on average. But the current inflation rates are around 6-8% p.a.
Give these figures a thought. The price you pay for your everyday goods and services is rising at 6-8%, whereas your FD investments are growing at only 5-7%. FDs do not increase the value of your money over time. In fact, you actually lose money or its purchasing power over time.
Do you think FDs are the safest investment option? Banks defaulting on payments is rare but definitely possible. The Deposit Insurance and Credit Guarantee Corporation (DICGC) guarantees Rs. 5 lakhs per person per bank if the bank defaults.
Let’s not forget the liquidity part of this instrument. Fixed deposits can have a lock-in ranging from 3-5 years. Banks penalize the investors for withdrawing money before the lock-in is over. This penalty is in the form of a reduction of interest rate by a certain percentage.
What are the best investment options for risk-averse investors?
The market is filled with many investment options for investors with varying risk appetites. Let’s look at some of the best investment options for risk-averse investors:
1. Short-term bond fund
The best alternative for investors who do not want exposure to FDs or volatile instruments. Short-term bond funds – bond funds with low maturity and a high
potential to offer better returns. Debt Funds with longer maturity are subjected to interest rate risk. But short-term bonds have a lower interest rate risk as their maturity period is much lower.
2. Municipal and Corporate Bonds
State and local governments and companies usually raise money by issuing bonds to the public. Bonds offer lower risk than stocks.
When a company is winding up, the bondholders are given first preference in the payment and settlement order.
3. Other debt funds
Other debt funds include banking and PSU Funds, ultra-short duration funds, Dynamic Bonds, etc. You could always invest a lump sum in these debt-based mutual funds and opt for a Systematic Withdrawal Plan (SWP).
This would ensure that along with the returns being generated on your investments, you would also get a monthly income from these investments. This investment option is one of the best options for older people who want a monthly income.
4. Liquid funds
Invest in top-rated liquid funds to avoid loss of capital with a higher degree of safety for your primary investment.
Also, when the market moves up, your investment performs better and generates higher returns in line with the market.
5. Dividend growth stocks
Stocks are not as safe as cash, savings, or other debt-based instruments. But they are safer than options and futures. Dividend-paying stocks are considered safer than high-growth ones as they minimize volatility, if not eliminate it.
You don’t depend on the value of the stock as you get a dividend as a regular income on your investment.
Apart from debt-based investments, you could also apply a staggered investment approach in equity-based mutual funds for a long-time horizon.
A periodically rebalanced portfolio helps you minimize your portfolio volatility and ensures efficient capture of up-market and down-market movements even with equity exposure.
Take the help of an Investment Advisor who will guide you through goal-based planning and help you choose the investments that are most suitable to your goals and objectives and your risk appetite.
FAQs
What type of investments do risk-averse investors prefer?
Risk-averse investors typically prefer conservative investments with lower volatility and more predictable returns. These may include government bonds, high-quality corporate bonds, certificates of deposit (CDs), and stable dividend-paying stocks. These options aim to preserve capital while providing modest growth, aligning with the risk tolerance of such investors.
What are 3 high-risk investments?
Three high-risk investments include investing in individual stocks of volatile and speculative companies, trading in cryptocurrencies known for their price volatility, and investing in startups or early-stage ventures that have higher failure rates. These investments offer the potential for significant returns but also carry a substantial risk of loss.
Which investment is the riskiest for investors?
Investing in highly speculative and unproven assets like cryptocurrencies, especially in lesser-known or new coins, can be among the riskiest options for investors. The volatile nature of these assets can lead to substantial financial losses due to sudden price fluctuations and lack of regulation.
Which investment has the highest return without risk?
No investment offers guaranteed high returns without any risk. Investments with potentially higher returns often come with varying degrees of risk. While some low-risk options like government bonds or savings accounts provide stability, they usually offer lower returns. Diversification and a clear understanding of risk are important for any investment strategy.
