JOIN US“Risk comes from not knowing what you’re doing.”
Warren Buffet.
In simpler terms, risk is the chance or probability of loss of value of an asset or the probability for an asset to give a negative return for an expected period.
A low risk investment means that the particular investment has had a history of giving consistent returns for a given period of time. Such investments have a fixed maturity value which is certain.
The probability of capital loss or getting a lower maturity value is negligible. However, all these instruments are also exposed to a certain amount of risk, which is comparatively very low and are also backed by some underlying asset as protection. Therefore, protection of capital and income are the key benefits of no or low risk investments.
Some of the different types of low risk investment instruments are:
*Fixed Deposits of Banks,
*Corporate FDs
*Tax Free bonds
*Post office Savings Schemes i.e. NSC, PPF, Sukanya Samriddhi Scheme, KVP, PO Recurring Deposit, PO Monthly Income Plans, etc
*Guaranteed Endowment Plans
Who should invest in such low-risk instruments ?
Some important parameters need to be considered while choosing investments. Some important criteria are:
*Age of the individual is a very important criterion. The older the person, the lesser the risk one must take. As we get older, we would require a fixed income and pension since we may not be earning and therefore need to invest in low risk investments.
*The ability of an individual to take risk and how he reacts to market movements, i.e. if a person panics at every market movement, he may fall sick when he sees negative returns or his capital become negative and therefore should invest only in no or low risk instruments.
*Time horizon for the investment — the time horizon, the lower the risk one can take.
Also, one must clearly define all milestones and liabilities i.e. what and when are the various milestone payments required to be made.
For example, children’s education, purchase of a house, marriage of a sibling and retirement, among others. And, what and when are the various loans that need to be repaid need to be planned before any investment is made. Based on the above criteria, asset allocation or the division of your investments into various classes of investments, such as low risk and high risk can be done .Then constant monitoring of the portfolio is required for it to be healthy and profitable.
*Expected returns of low risk investments: The higher the risk, the higher the return and vice-versa. This is indeed the most common mantra for investing. Low risk related investments will yield lower returns but are predictable and can sometimes be guaranteed.
Here are some details of returns one can expect from such investments:
*Tax free bonds: Current rate of tax free bonds are between 6.4% and 6.6% per annum. Such investments are recommended for those who fall in the higher tax bracket.
Tax free bonds are available with investment tenures of 10 years, 15 years and 20 years.
Difference between investing in Post Office schemes vs various schemes from banks:
The main difference between the PO schemes and the schemes of banks is that the issuer and guarantor of all PO schemes is the government of India which makes it a zero– risk investment. And some of the PO schemes have an additional tax benefit.
Therefore, low risk investments must surely be part of all portfolios. What is important to keep in mind is the monster who eats away the value of your money — inflation.
Therefore, asset allocation and planning your investments are key to knowing what to do with your money. You can then plan your investments accordingly.
(The writer is Managing Director at Sinhasi Consultants)