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Which Investment Option Is Best For The Risk Averse Investor?

Which Investment Option Is Best For The Risk Averse Investor?

Introduction:

All investments come with a certain degree of risk to the investor’s capital. While some individuals may readily accept higher risk endeavours for the potential of greater returns, others may be more cautious and risk averse in distributing funds within their investment portfolio. The level of risk involved in most types of investments can be gauged from the volatility of prices in the market at the time. High price volatility in the market is usually related to higher risk investments, which can either generate spectacular returns or entirely consume the invested amount in a short span of time. Low risk investments are generally associated with more stable market prices, which often entail relatively low but consistent returns in the long term. There is also little chance of the investor losing most or all of their initial capital amount in these situations. Ideally, the returns on a low risk investment should either match up with or exceed the currency value fluctuations due to inflation over time.

Risk averse investors are generally more conservative in their approach and often prioritize safeguarding their capital over the prospect of the high potential gains offered by more volatile investments. These types of investors may also desire a high degree of liquidity in their investments that would allow them to withdraw funds at their own discretion. Many older investors and retirees tend to be more risk averse in their approach as they may be investing in order to generate gains on their savings for use in the near future.

Low Risk Investment Strategies:

Risk averse investors would ideally stay clear of investment options such as equity or forex which both involve high price volatilities. Some low risk investment strategies for risk averse investors may include:

● Fixed Deposits:
Fixed deposits allow individuals to deposit a sum at a bank or other financial institutions and earn interest on it for a predetermined period of time. An integral feature of fixed deposit investments is the safety of the invested sum, despite the relatively low degree of liquidity and returns. They are also tax exempt up to Rs. 1.5 lakhs under Section 80C of the Income Tax Act, with a lock-in period of 5 years.

● Savings Accounts:
Certain high yield savings accounts allow for decent long term returns with virtually no risk of incurring losses on capital invested. However, the term high yield is relative to other types of savings accounts and ideally, the rate of return should at least exceed the prevailing levels of inflation. This option has the lowest amount of risk on the list, but also generally yields lower returns.

● Provident Funds:
This option is best suited for those planning on saving for retirement due to the high degree of safety and regular returns offered by them. Tax rebates on these are generally allowed on the sum invested, upto Rs. 1.5 lakhs as per Section 80C of the Income Tax Act. Investments can be either made in yearly lump sum amounts or in monthly installments. Public Provident Funds have a lock in period of 15 years after which their tenure can be extended at 5 year intervals.

● Corporate Bonds:
Bonds are debt instruments issued by corporations that pay a stated dividend to the investor on maturity. While there is a minor risk of defaulting on corporate bonds, bondholders are prioritized directly after creditors in case the company becomes insolvent.

● Government Securities:
Bonds which are issued by the state and central governments are often referred to as government securities and either pay dividends on maturity in the case of treasury bills, or twice annually in the case of dated G-Secs. They are generally a low risk investment as they are backed by a sovereign guarantee. However, they also yield lower returns when compared to other types of bonds.

● Stocks:
Certain types of stocks such as dividend yield stocks for larger companies may provide relatively high gains on dividends while also allowing you to enjoy the benefits of capital gains. While they aren’t entirely risk free, they tend to be associated with more stable and well established companies. Alternatively, purchasing preferred stock in a company would allow a similar level of returns on each period while also participating in capital gains. They are also prioritized over other shareholders in case of insolvency.

Conclusion:

There are a number of options for those looking to make gains on their investments at minimal levels of risk. Choosing one depends on your appetite for risk. While most low risk investments may provide steady returns for the risk averse investor, the yields generated by them exclusively may often not live up to their requirements and may force them to diversify their investments.

For those seeking to make investments, Tata Capital Wealth offers an array of tax deductible products and investment options. Their team of experienced wealth managers are ideally suited to aid you in formulating a low risk, diversified investment strategy that best suits your needs for the future.

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