Low risk, high return investments: Do they even exist?

Risk and investment go hand-in-hand. It is believed that the higher the risk, the greater your returns are. On the other hand, it’s believed that the returns will be low if an investment is a low risk. But that doesn’t always have to be true. There are low-risk, high-return investments that are capable of generating significant profit. We will discuss them in the article.  

What is investment risk?

The concept of risk is different for every investor. A company with high debt will be considered risky by investors.

While different formulas and ratios are available to measure risks, it is commonly associated with asset price volatility. The definition says that risk is the probability or likelihood of occurrence of losses against expected returns on investment.

Why does high risk equal high returns?

Let’s understand how higher risk is associated with higher returns regarding stock investment. 

If you are investing in shares, the price will change every minute. The price volatility translates into profit opportunities. The higher the price change, the higher will be your capital gain. To avoid risk, you will look for less volatile stocks. But in this scenario, the price change will also be less, meaning the returns will be pretty low. 

In real life, you will see a very high percentage increase or decrease in small company stocks. Hence, investing in these stocks can generate higher returns for investors. The Modern Portfolio Theory included the traditional concept of risk and measured it based on volatility. 

Volatility is measured by comparing the stock’s past returns with the historical average returns of the market. Beta is the measurement of volatility. Shares with more than one beta are considered high volatility, meaning that market movement will significantly move the stock price.  

A better way to compare risk is to look at a company’s past performance. A low debt company tends to give better returns than high debt companies in the long run.

Factors for maximum returns with minimum risks in MF

Many investors believe they need to invest in medium-to-high-risk equity funds to earn good returns on their mutual funds. But several low-risk funds are earning significant returns for investors.

In low-risk, high-return mutual funds, when the fund manager invests in low-risk securities, his primary objective is to preserve the capital. He does it by investing in high-rated securities, bringing risks down to near-zero 

Here are a few factors that will help you reduce the overall risk of your mutual fund portfolio.

Understanding risk

Risk tolerance is different for each investor. Hence, you need to understand your risk appetite before investing. 

Do market research 

Hundreds of mutual funds are available in the market, so you might have to research the market before investing.

Calculate risk

Before investing, go through the asset allocation of the mutual fund to check if the risk is within your tolerance level.

Consider tax

If you don’t plan, tax can eat up your profit. Hence, while calculating returns, always keep the tax in mind.

7 low-risk investments with respectable returns 

Low-risk, high-return investments are pretty popular. Here are some favourite low-risk investment options.

High-interest savings account

While opening a savings account, you can choose a financial institution offering better returns. You should also compare the charges, customer service, and online account management facilities to ensure a smooth experience.  

Annuities 

Annuities are excellent investments to protect your income in the future. Various annuity products are available – fixed, variable and equity-indexed.

Money market funds

Money market funds invest in risk-free instruments. These are ideal for investors who want to protect their principal.

Municipal bonds 

These are bonds issued by local municipal authorities and considered risk-free investments. 

Certificate of deposit 

You can obtain a certificate of deposit from commercial banks against minimum investment of Rs 1 lakh.

Treasury bills 

Treasury bills issued by the government of India are short-term investments with a maturity of one year or less. There are 91-days, 182-days, and 364-day treasury bills.

Fixed deposits 

Fixed deposits are one of the safest investments earning fixed interest on your deposit.

Explore more low-risk investment options. Open a demat account with Angel One and start investing.

Disclaimer – This blog is exclusively for educational purposes. The securities quoted are exemplary and are not recommendatory.

Suggested Read:  Dividend Stocks in October 2022