What Are the Low Risk Options for an Investor

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Updated: 23 September 2020

Regardless of whether you are a novice or an experienced investor, having knowledge about low-risk investments is important. Today. The investment sector is large, and some assets have high-risk factors, which need to be handled with a lot of care. It is advisable that you seek the assistance of a professional to guide you in your investment deals and help you attain maximum returns with low investments.

  • Types of investment risks
  • Safe investments with high returns
  • Low-risk investments
  • Safe investments

Types of Investment Risks

The most common mistake made by investors, is that they tend to assume that a given investment is either risky or safe. However, the diversity in the investment available today cannot be classified so simply.

LOW RISK Investment

The different types and levels of investment risks include:

  • Market risk: this is the risk that an investment can lose its market value.
  • Interest rate: this is the risk of an investment losing value as a result of interest rates increase.
  • Reinvestment risks: this is the risk of an investment being reinvested at a lower interest rate once it matures.
  • Political Risk: the risk of a foreign investment losing value as a result of the political action of that country.
  • Liquidity risk: the risk of an investment not being available for liquidation when needed.
  • Legislative Risk: the risk of an investment losing value or other benefits that it offers as a result of new legislation.
  • Tax Risk: this is the risk of an investment losing its value or return due to changes in taxation
  • Purchasing power risk: the risk of losing value of your investment as a result of inflation.
  • Currency risk: the risk that arises from investing in assets in a different currency

TYPES OF INCOME BEARING INVESTMENTS

Lending money to the government is a safe investment as it is likely to be repaid. Peer-to-peer lending on the other hand is less safe. In between, lies lending money to well established corporations that carry a higher risk than government bonds but less than peer-to-peer lending. Investing through a bond gives the holder a claim to the company assets if the company is going bankrupt and therefore carries a lower risk than investing through a stock.

Interest rates are something of concern too. With the rise in the interest rates, any investments with fixed rates interests may lose their relative value. If you try selling it on the market, it will be less worth than the amount you paid to acquire it if the interest rate increased whilst holding it. In most cases, at maturity you will receive the principal of the bond. When considering the type of investment, consider its level of safety. Ensure that it is an investment that is worthwhile making and you will not end up counting losses. But do investments with low risk and high returns exist?

LET’S LOOK AT SOME OF THE INTEREST-BEARING INVESTMENTS

SAVINGS ACCOUNTS

If you are looking for a safe investment, that you can rely on to earn some interest for your money, a high interest savings account may be the answer. With such an account, you will earn an interest amount by just depositing your money. Apart from opening your account and making a deposit, this investment type requires almost no efforts from you. The best type of savings accounts offers you with competitive interest rates without any charges. When choosing an account, ensure that you open one that is reputable for providing quality customer services, online management of accounts, easy access and deposits. Most of these accounts are government insured to a certain limit and you will most likely be compensated even when the financial body fails. In the UK bank account holdings are guaranteed up to £85,000 by FSCS. There are other benefits that are associated with savings accounts. One is that it allows you to set automatic deposits. You can set monthly or weekly automatic deposits from your checking account into your savings account. The savings account also lets you connect your savings accounts to your checking accounts. This allows you to use your savings account and transfer money to your checking account at any time. Saving accounts also allow for quick liquidity.

CERTIFICATE OF DEPOSIT

Certificate of deposit is another type of investment. This type of investment is popular as it is FDIC insured and is less likely to lose value. When you deposit your money with a CD or Certificate of Interest, it will be for a specific length of time and it will be for a guaranteed return on your cash regardless of what happens to the rates of interest during that time. As long as the financial institution you make your deposits is FDIC insured, you have a guarantee of getting your money back provided that the total deposits you have in that bank are less than $250,000. The government offers you with a guarantee of not incurring a loss, and the bank will give some interest on top of it. It is easy to compare certificates of deposits as the majority of US banks offer similar terms. The only difference that they may have is the penalty for early withdrawal, and what you will pay for closing a certificate of deposit early. Often, most banks will charge you 90 days of interest on CDs on a term that is shorter than one year and 180 days on those terms over one year. Banks offering 60+ month CDs may reduce as much as one year’s interest.

MONEY MARKET FUNDS

Money market funds consist of short-term bonds, CDs and other low-risk investments combined together to come up with a diversification that has fewer risks. Money market funds are commonly sold to mutual fund companies and brokerage companies. Money market funds are liquid meaning that you can withdraw your funds at any particular time without risking penalties. Money market fund is a safe investment that tries to pay out a little bit of interest as well to ensure that banking your money with the fund is worthwhile. The goal of this fund is to maintain Net Asset Value of $ 1 per each share. The funds have a strong way of protecting the underlying value of your cash. While it is possible for the NAV to drop below $1, it is quite rare. You can invest in money market funds through a great broker with banks offering high interests saving accounts. When it comes to money market funds, you are less likely to make a lot of interest on your investment, but you will not have to worry about losing great amounts of your initial capital or the day-to-day market fluctuations. It is a good low-risk investment that you can consider when looking for best safe investments with high returns. A due diligence process needs to be carried on when selecting the fund as not all fund will

invest in the same way with higher returns being driven by investments more risky assets like commercial issued by companies to fund their day to day operations.

GOVERNMENT BONDS

Government bonds are a type of fixed income investment by which you are lending money to a government in exchange of regular payment in the form of a coupon with the principal being repaid at maturity. The interest rate received varies depending on the maturity of the bond. Bonds with maturity less than one year are issued at a discount with the investor being paid the national value at maturity. As the name states, the government is obliged to make the payment of the coupon and the principal at maturity. The caveat is that not all the governments and implicit not all bonds have the same creditworthiness. Usually each government’s debt carries a rating issued by rating agencies like Standard & Poor’s that takes into account economic, political and administrative factors in performing their assessment. This would be the first stop in the decision to select a bond issued by a government. A special kind of government bonds are inflation linked bonds where the coupon payment are indexed with the level of inflation. By investing in this type of bonds the inflation risk is mitigated.

MUNICIPAL BONDS

When a local government needs to borrow money, they do it by issuing municipal bonds. These types of bonds are of two types; general obligation (GO) or Revenue Bonds. A GO bond is a type of bond that doesn’t have any revenue back up while the revenue bond is secured by a reliable source of revenue. These bonds are commonly known as minus and are exempted from Federal Income Tax. Thus, they are a safe investment option for people trying to minimize their taxes exposure. Most states and local municipalities also exempt these bonds from paying income tax. Municipal bonds are one of the best low-risk investments with high returns. They are safe, as you will be exempted from paying the income tax giving you a higher return compared to an equally risky investment with a tax label. Also, the risk of the borrower defaulting is quite low. It is quite rare for the municipal governments to go bankrupt. The governments can always raise taxes or issue new debt to pay old debt. It is possible to buy individual bonds or invests in the municipal bond mutual fund from licensed brokers.

TYPES OF LOW-RISK INVESTMENTS

FIXED ANNUITIES

Fixed annuities fit to be termed as one of the best low-risk investments for investors wishing to stabilize their portfolio over a long period. Annuities are a complex financial instrument with many catches built into the contract. Before you can sign on an annuity, it is important that you understand all that it entails. If you choose the fixed annuity, there are some things that you must understand. Fixed annuities allow the investor to put in an unlimited amount of money and let it grow with the exempt from taxes until retirement. Also, the initial capital and interest is secured by both the financial ability of the insurance company issuing them as well as by the state guaranty funds. Fixed annuities also have low rates of about 0.5-1%. There are other carriers that will offer a higher initial rate. The major risks involved with annuities are liquidity risks resulting from early withdrawal risk, purchasing power risk and interest rate risk.

TYPES OF LOW-RISK INVESTMENTS

CORPORATE BONDS

The corporate bonds are low risk investments that are offered by companies. Corporate bonds are rated as being low, high or medium quality. As for the government bonds, rating agencies would

provide an indication of the quality of a bond through the rating assigned to the issue bought. You will encounter some high-yield corporate bonds that are low rate and low quality. These can be considered to be riskier as the investor is facing not only the interest rate risk but also the default risk too. The interest-rate risk involves a case where the market value of a bond can fluctuate with the change in the interest rates. Default risk is the risk of a company failing to keep its promise to make the principal and interest payments. Generally, bonds are considered to be lower risk than stocks but neither of them is without risk. In most cases, these bonds pay more than the government bonds and are a good option for anyone who wishes to invest for a short period. Corporate bonds are of four types namely: secured bonds that are backed by a collateral in the form of company’s assets or stream of revenue; convertible bonds-these are bonds that can be converted to the common stock of the corporation at a predetermined price if the investor agrees to it; unsecured bond which is backed by the promise made by the corporation to pay; and zero-coupon bond which has no interest payments but are usually issued at a discount.

DIVIDEND-PAYING STOCKS AND MUTUAL FUNDS

By targeting stocks and mutual funds, you can get more returns on your stock investments. If you find out that two stocks have the same performance over a given period but one has no dividends and the other has some amount of dividend on a yearly basis, you might want to go with the latter option. Picking individual stocks is not easy and comes with some risk of the company may become bankrupt which implies you losing your investment. It would be safer for you to invest in a dividend stock mutual fund. In this type of investment, the fund agency targets stock that has good dividends and ones that will work for you. The investor also has an option for diversification preventing one stock taking up your whole investment. There are several types of mutual funds to consider. Some of the major types include bond funds, balanced funds, stock funds and index funds. The bond funds contain fixed-income securities as an asset, stock funds make investments in shares of various different firms, and balanced funds are a mix of stocks and bond with a varying ratio of the two depending on the strategy of the fund.

Conclusion

Investors who are seeking the low-risk investments have many alternatives to choose from that can offer high returns. However, it is important to understand that there is no such thing as a completely risk-free investment as different investments have different types of risks. But those that are looking for low-risk investments that have no guarantee for principal can receive higher interest rates than those who opt to invest in the bank. For those nearing retirement, it is essential for you to reduce your risk as much as possible. It is not good for you to start losing large amounts of cash at this late age but rather you need to preserve it. The best low-risk investment will assist you in saving your money. They will allow you to earn a nominal amount of interest on your principal with low risk involved. You can never go wrong with such investment. You just need to exercise caution when choose which ones to invest in and then your money will be safe.

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