In a previous post, we explored some of the various benefits of investing, a very useful breakdown especially for beginners. Although investing is a highly profitable financial habit, many prospective investors are often unsure where to begin their investment journey. Sometimes, picking the right investment option can become complicated, thanks to the myriad of overly dramatic investment opportunities that are readily available today. But as a beginner, it is best to start with the low-risk investment options to avoid hurting your finances deeply if things go south.
In this post we will go over the major assets to consider from assets with low risks to riskier assets in ascending order.
Here are the low risks investments discussed in this post
- Cash Deposits
- Mutual Funds
Most investors tend to put a larger portion of their portfolio in these low risks investment to avoid loosing a lot of money that would impact their financial status or future plans.
Cash deposit is one of the most common low-risk investment options for beginners. It offers a modest return, usually in the form of interest payments, ranging from 2–5% per annum. Beginners can easily create a savings account with traditional banks or relevant online apps. The funds are easily accessible in emergencies, but the returns are relatively low.
Interestingly, cash deposits in traditional banks are often government-insured, ensuring that you get compensated if the financial institution goes under. Hence, cash deposits are also regarded as defensive investments since they provide stable returns with a very low risk of losing your capital. Although your cash deposits are safe in a savings account, the purchasing power might decrease due to inflation. For example, if your savings earn an interest of 2% and inflation rises by 4% annually, you will be losing up to 2% of purchasing power annually.
A bond is an ideal investment opportunity for new investors who are looking to test the waters without hurting their pockets. They are modest investments that come with little or no risk of losing your capital. Investing in bonds is not as complicated as many people feel; bonds are simply a way for companies and the government to borrow money. The loan is to be paid at a stipulated time in the future with an interest that is often expressed as a percentage of the capital. And since the maturity date of the bonds is always predetermined, investors can get to calculate the exact returns they will make.
Bonds can be used by companies, states, and sovereign governments to finance projects. Instead of going to a bank, many companies would prefer to get the money from investors who are willing to buy their bonds. When investing in bonds, the lender and borrower document the bond details, which include the tenor of the bond, the due date when the principal of the loan is due to be paid to the bond owner, fixed interest payments to be made to the bond owner, and other essential details.
This low-risk investment allows investors to pool funds together and invest in securities like stocks, bonds, money market instruments, and other assets. The mutual funds are managed by expert money managers, providing individual investors with access to professionally managed portfolios of the invested securities. It is important to note that the value of the mutual funds is dependent on the performance of the individual securities that make up the portfolio. This means that whenever you invest in a unit share of a mutual fund, you are simply buying the future performance of its underlying securities. Interestingly, each investor in a mutual fund participates proportionally in the gains or losses of the fund.
Exchange-Traded Funds (ETFs) are a popular low-risk investment vehicle that comes as a tweak to mutual funds. ETFs utilise the investment strategies of mutual funds. However, they are structured as investment trusts that are traded on stock exchanges. Also, ETFs come with lower trading fees than mutual funds.
Also, similar to index funds, ETFs can track a market index. For instance, you can buy an ETF that tracks a market index like the S & P 500. But, unlike the index funds that have a minimum investment, ETFs are traded conveniently throughout the day and can be bought with a share’s price, which ranges from $100 to $300, depending on the fund. Overall, ETFs are generally more cost-effective, versatile, and convenient, hence their popularity.
Stocks are publicly traded company shares that anybody can purchase. The value of these stocks is dependent on the fluctuations in the economy and corporate performance. Economic fluctuations can cause the value of stocks to rise and fall. So, investors must be prepared to deal with this irregularity to realise long-term returns. Many investors appreciate the stock market’s versatility. Some people take a passive strategy, investing in equities for the long term, while others actively trade their stocks.
Stocks aren’t as safe as cash, savings accounts, or government bonds, but they are safer than high-risk investments like cryptocurrency and futures. Stockholders profit by getting dividend payments from corporate profits or selling equities at higher prices. However, stock market investors also bear risks linked to market volatility.
While investing can be financially rewarding, the best bet for beginners is to take calculated risks and start their investment journey with low-risk investments. Most low-risk investments, such as cash deposits, bonds, mutual funds, ETFs, and stocks, offer stable returns with little or no risk of losing your capital. Although these low-risk investments may offer relatively lower returns, it is best to start your investment journey with them before deep-diving into some high-risk investments.
We will do a deep dive on each asset class in the future and also cover some alternatives to these investment options.