The risk-taking capacity varies from person to person. It usually depends on factors like income, age, financial responsibilities, etc. For example, the risk appetite of a young person would usually be higher than the retiree. Young person has an entire career to recover from an adverse financial situation, whereas retirees don’t have much time left to recover from an adverse financial situation.
People who don’t want to take a high risk when investing money are called risk-averse investors. Such investors prefer the safety of their fund over the higher return on investment. As the return is directly correlated to the risk attached to an investment, therefore taking low-risk results in low return for the risk-averse investors.
So, how to know which are low-risk investment and how to ensure a good return being a risk-averse investor? Let’s find out steps to smart investment strategy for the risk-averse investors.
Where to invest?
Not all investment instruments are suitable for the risk-averse investors. Especially equity-related investment products like shares, equity mutual funds, etc. can anytime result in loss of the investor’s capital. Investment products like debt mutual fund, gold, FDs, PPF, KVP, NSC, etc. are highly secured and suitable for most risk-averse investors. However, the selection of low-risk investment instruments should be made in sync with the investor’s financial goal. While investing in low-risk instruments, the investor must evaluate its tax efficiency, liquidity, charges involved, the flexibility of entry and exit from the investment, and so on.
How to invest?
Investment by way of instalments i.e., like a systematic investment plan (SIP), should be preferred over the lump-sum investment, especially if it is debt mutual fund or gold. The investor can park the lump-sum fund in a liquid fund and initiate monthly SWP of a fixed amount. The SWP can be used to invest in a debt fund or the gold.
To invest in FDs, the investor can use the laddering option to ensure higher flexibility and to get the benefit of interest rate averaging in the long term. It is better to use the FD laddering by distributing the fund to different banks and by restricting each FD amount to be below Rs 1 lakh to further reduce the risk of a bank’s shutdown.
Have a diversified portfolio
Risk-averse investors should distribute the investment across different asset classes while adhering to their short and long-term goals requirement. For example, an investor can invest in the PPF for the long-term, but if there is a requirement of higher liquidity, then investment can be made in FDs or debt mutual funds. Further, investment diversification should be done within a particular asset class as well. For example, when investing in the debt mutual fund, the investor should put money in different types of debt funds and with various mutual fund companies to further reduce the risk.
How much return should one expect?
The return expectation should not be unrealistic, and it should be in sync with the investor’s financial goal. Suppose, the investor wants to buy a home after 5 years, and for that, he wants to arrange the down payment of Rs 10 lakh. Assuming a post-tax return of 8% pa, if he invests Rs 14000 pm, then at the end of 5 years, he’ll be able to build the corpus of Rs 10 lakh. So, if the investor expects a return of more than 8%, then it may increase the risk to that extent.
The return provided by various risk-averse instruments is mentioned in the table.
Finally
Being risk-averse is not bad a thing when investing, but becoming too engrossed in it can negatively impact the investor’s wealth creation. Sometimes, due to over risk aversion, the investor lands up earning a negative real rate of return on investment. It results in capital erosion in the long-term. So, it’s crucial to select the appropriate investment instrument to ensure that the return on investment remains higher than the prevailing inflation rate during the invested period.
(By Ravi Jain, Chairperson, JRK Group)
(Disclaimer: The author is not a SEBI-registered advisor or a financial adviser. The article is for educational purposes only and does not constitute specific financial, trading or investment advice.)
Note: Article originally appeared in financialexpress.com . Link to the source article is as mentioned below:
https://www.financialexpress.com/money/best-investment-options-for-risk-averse-investors/1750478/