Low risk investment is often considered the magic mantra for absolute profit.
Given the economic uncertainty in markets today, hedging your risk is a primary condition.
The problem is how and where should you be investing?
While you understand the basics of savings, investment is a different ball game.
Most investment instruments that promise high rewards also come with high risk.
Almost every investment that promises huge returns comes with many associated issues.
Often investors are torn between great returns and low risk.
So, in times of liquidity crunch and huge financial stress, the latter inevitably wins.
But the question that comes up is their magic combination?
Are there any low risk investments that can help you make a real profit?
This is important because without it, garnering real profit is difficult.
But most times, investors end up doing just this for fear of high volatility.
After all, no one wants to lose money.
However, the strategies for investment also depend on the time-period.
As a result, you have to look at a comprehensive picture.
Only then you can get an appropriate balance of great returns and reasonable risk.
In this context again, the purpose of savings is important.
If it is your retirement savings, you do not want to rock that boat too much.
But let’s say relatively short term options gives you the option to play with schemes.
Moreover, when the money at stake is limited, you have higher propensity to take the risk.
But when you have to manage a huge sum, you are worried and will want to play safe.
The modes of investment change according to these key factors.
Modes of Low-Risk Investment
Here is the list of the low risk investments for those who don’t want to take a big risk and are eager to make profit safely:
- Certificates of Deposit
- Money Market Funds
- Stocks That Pay Dividend
- Preferred Stocks
- Peer to Peer Lending
- US Savings Bonds
1. Certificates of Deposit
CDs or Certificates of Deposits figure prominently as low risk investment.
This is a fixed-term loan that you give your bank.
The idea is to let the bank use the money for a specific period.
It can be anywhere from 6 months to 2 years.
But this is not for free.
The bank pays you a certain rate of interest in exchange for the money.
So basically when the term of the loan expires, you get the principle and the interest too.
Therefore, more the number of years you loan to the bank, more the interest you gain.
Let me help you explain with an example for better clarity.
Let’s assume that I have $1000 that I can invest.
So I made a 1-year CD for $1000 with my bank.
Let’s say that the bank decides to pay me an annual rate of 1%.
So by the end of one year, I have $1010.
The additional $10 is my gain from investing $1000.
So now I have two choices, I can either enjoy $10 or again reinvest this $10.
One of the advantages of CDs, it is insured by the FDIC.
This means that you cannot lose the money in any way.
Moreover, the rate of interest is much higher than what you expect in the regular savings account.
Nevertheless, there are some distinct disadvantages as well.
The problem with a CD is that your money is locked for a fixed tenure.
You cannot move it during that time.
So you cannot address any sudden financial requirement.
You have to pay some penalty for early withdrawal.
You may choose no-penalty CD, but the rate of interest is lower in this.
So it can be a low risk investment but the scope to earn the profit is fairly limited here.
2. Money Market Funds
Money market fund is another conventional low risk investment.
You can also term them as mutual funds of the bond market.
These funds invest in low-risk, short-term securities and help your money grow.
The investment options include T-bills, municipal bonds and even CDs.
This form of investment was a huge hit in the 1980s.
Just like any other security that is bought/sold in open market, this one has FDIC backing.
A large number of banks and brokerage houses offer investment opportunities.
A select number of mutual fund companies also offer these funds.
The best thing about the money market funds is, these are liquid funds.
You can get a same-day settlement, and these are, in anyway, more accessible than most others.
So if you suddenly need money, you can easily sell these and get money the same day.
Another reason why money market funds are safe is primarily that of their investment profile.
These funds are big investors in stable and short-term securities.
This means the relative volatility in these funds is significantly contained.
But that does not mean that these funds are completely risk free.
The interest rates tend to waver, and the principal too can see value erosion.
Inflation is another major problem for the money market fund.
If you just analyze some past data, you can calculate the risk.
Around February 2016, the interest rate on these funds dropped to 0.1%.
Now, this is almost as paltry as the interest on your savings account.
So in that context, the overall advantage is not too much.
You can consider it as good or bad as the savings bank account.
The overall rate of interest after inflation adjustment was hardly anything.
3. Stocks That Pay Dividend
When you are exploring low risk investment, dividend paying stocks are another bet.
These are generally low volatility counters and operate within a set range.
Investors get attracted to these stocks primarily for this reason.
While on the one hand, they do not have huge swings, they have a steady value.
Most importantly there is a certain regularity of income associated with these.
Often the dividend yields can be much higher than what you get in risk free instruments.
Another big advantage is that you can now look at pocketing capital gains too.
So the same source helps you earn in two ways.
First and foremost, you get the dividend and then the capital gain too.
As is common in any stock price, they can waver over the short-term.
But on the whole, prices give positive gains over the long-term.
Though the volatility is lesser, these are not completely risk free stocks.
After all, they operate within the ambit of stock markets.
Any drastic movement in the market will surely affect these as well.
But on the brighter side, these are all long-term players and exude confidence.
They also have a very long dividend paying history.
So the general reliability and stability are much greater in these counters.
This is why they can also withstand volatility a lot better.
Growth stocks can get hammered, but dividend stocks somehow escape bloodbath.
The icing on the cake is that you can also have tax free advantage till a certain percent.
Also, with the backing of a generous dividend, you get more strength to hold on to a stock.
This is especially true in terms of a declining market.
Moreover, with the dividend money, your value erosion is much lesser.
This is another level of assurance for your investment.
4. Preferred Stocks
Another type of low risk investment is the preferred stocks.
As the name implies, these stocks have greater preference over common stocks.
So compared to average shareholders, these shareholders have a larger say.
Not just that, they also have a much larger claim on the company’s earnings.
The stock’s assets also have differential claims.
Preferred stockholders also have a bigger claim on these assets.
So if I am a preferred stockholder of Company ‘A’, what are my advantages?
Well, I will be paid before the common shareholders in case of a dividend payment.
That means it gives me a special status to hold these special shares.
Well, primarily, these preferred stocks are a cross between bonds and stocks.
Therefore, you get a more predictable dividend payout for these preferred stocks.
Most times these preferred stockholders have a certain dividend level.
But in comparison, common stockholders will get payment when the board announces this.
Many times, a Board can choose to reduce or cancel the dividend of common shareholders.
However, preferred stockholders don’t have to handle such issues.
If the company is going through tough times or there is an economic crisis, the special status can be useful.
Preferred stockholders will always be paid before general shareholders.
So if there is a risk of liquidation, the risk is much lesser.
After payment to bond-holders and creditors, the preferred shareholders are next in line.
Even in times when the company suspends dividends, preferred stockholders have an advantage.
They are entitled to get arrear payment before the company starts paying common shareholders.
So it becomes a significantly low risk investment.
Reliability of the investment is the next big advantage.
So despite a crisis, the preferred status works as a guarantee for your investment.
The next in line is another conventional low risk investment.
They can be a great low risk high return option.
But the trick is that correct interpretation is crucial in this case.
In the absence of appropriate interpretation, annuities can be risky too.
Another big problem is the relatively higher fees associated with annuities.
Your financial advisor has to understand your risk profile and investment target well.
Only then, they will be able to provide the ones that are tailor-made for you.
But remember annuities are never for first-time investors.
It is totally for season industry veterans.
Sophisticated investors who have a complete grip on their finances must go for these.
The annuity contract has many provisions.
The investor has to be sharp enough to understand these and take a call.
Specific types of annuity have a specific rate of return.
This is why you have to be careful about what you decide upon.
But one cardinal rule is a constant with all annuities.
Higher the return expectation, greater is the risk profile.
Annuities, however, are not insured by the FDIC like banks savings account.
But at the same time, they come with a certain degree of guarantee.
They are invariably always backed by insurance companies.
This indicates that they can deliver above average returns on the investment.
However, making a careful choice remains a crucial factor.
6. Peer to Peer Lending
The current spate of economic turmoil has changed the investment landscape.
It has created many new and interesting avenues to grow your money.
But the biggest advantage is that these are also equally low risk investment opportunities.
The peer-to-peer lending concept is one such by-product.
As liquidity crunch began to impact borrowers and banks became hesitant, these came to rescue.
Essentially these lending companies connect interested borrowers to willing lenders.
These lenders are essentially small time business owners and individuals.
They leverage on their personal savings to earn a few extra returns.
So anyone in need of a loan but without a credible credit history can approach these lenders.
The Peer-to-peer lending sites act as a middle-man.
Both lenders and borrowers meet on a common platform.
The whole process is well etched out and streamlined.
So it proceeds quite seamlessly from application to final disbursement.
Borrowers can also apply for loans anonymously if they choose.
While the rate of interest may vary as per credit history, access to fund is crucial.
A close analysis also indicates that borrowers actually pay lesser interest than banks.
The lending policy is secured so well, that the scope of default is limited.
Moreover, even in case of one, the charges cover the cost for lenders.
This, therefore, is an undeniably high return low risk investment.
The overall rate of return is significantly higher.
The associated risks are significantly lower.
Moreover, it enables people easy access to money in terms of necessity.
So in many ways, it acts as a helpful neighbor willing to loan funds when you need.
The financial meltdown in 2008 led to a rise in this type of outfits.
Gold is one of those quintessential investment opportunities.
From time immemorial, humans have been using gold as a standard to measure their riches.
From being used as a guarantee to print new notes in banks to becoming a family heirloom, there are many roles.
In fact, gold is on the most sought after traditional safe haven for human.
On any given timeline, you will notice that the return from gold is significantly higher.
Most importantly apart from physical god, you can now invest in gold digitally too.
So it is one of the best known low risk investment in the market.
Analyst expectation indicates gold prices breaching even current highs.
Well, that can only mean good news for investors.
The digital investment in gold also cuts down theft of physical gold.
The gold markets are operational around the world 24×7.
This means they are also responsive to geopolitical development.
As a result, as an arbitrage player, you can even take advantage of the difference in prices.
So you can again look at earning in two ways from a single investment.
Moreover, gold offers a distinct amount of stability without compromising returns.
This makes it a great investment opportunity with convincing return prospects.
The type of investment and extent of money you put in also impacts returns.
8. US Savings Bonds
Last but not the least, US Savings Bonds is another convenient and low risk investment.
But technically speaking these are not strictly investment instrument.
It is primarily a savings scheme.
It is a great choice to provide protection against inflation.
The inflation rate is added at the end of every 6 months.
But overall you can expect a fixed rate of interest.
However, the relative rate of returns is also much lower.
The advantage is they have little or no risk associated with them.
But at the same time, you have to be prepared to give up high return opportunities.
Therefore, we can conclude that there are many low risk investment options.
But you also have to pay attention to the extent of investment.
As the old saying in savings cycle goes, ‘never put all your eggs in one basket.’
Similarly, even amidst low risk investments, it is best to divide and spread out.
This serves two main purposes.
First of all, you don’t expose your entire savings to any form of investment.
Moreover, the relative rate of return tends to be higher.
This means you can earn a higher profit with only a small risk probability.
No investment can offer 100% protection from risk.
But these low risk investment options are the next best bet.