Best Low-Risk Investment For You

The dividends of financial investments are always very attractive. Most times, people invest because they want to reap the same benefit someone else reaped, not because they want to put their money to good use. This article focuses on educating the layman on how to invest safely, basic risks involved with investing, what the risks entail and how to manage them.

The dividends of financial investments are always very attractive and over time have been the primary motivation for investment amongst peoples of various classes and age. Most times, people invest because they want to reap the same benefit someone else reaped, not because they want to put their money to good use. This investment approach is quite detrimental as it makes the potential investor ignore certain necessary things which ought to be done to guarantee a profitable and satisfactory investment.

Although the profit from investment is the primary goal, it is important to note that this goal can be jeopardized easily and as such, cautious steps need to be taken to ensure the right decisions that suit the individual are taken and in the end, these right decisions not only guarantee a maximum profit but fulfillment and satisfaction as these are also key to enjoying investment returns. This article focuses on educating the layman on how to invest safely, basic risks involved with investing, what the risks entail and how to manage them.

What Is An Investment?

Investment in strictly financial terms can be considered as the intentional action of buying financial products such as stocks, bonds, shares or physical products such as real estate, valuable metals like gold, silver, platinum, etc. with the intent of keeping it for a specific period in which its value would accumulate and sell it after the specified period at a higher price thereby accruing income.

In other words, an investment is the acquisition of an asset that is kept over time to allow appreciation of value then resold at a higher rate to make a profit. According to Britannica, investment is the process of exchanging income during one period of time for an asset that is expected to produce earnings in future periods. Going by the three definitions, it is evident that investment is a conscious action that is taken with hopes of a better return.

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Investing With No Risk – Is It Possible?

The short answer is no. Investments always involve risk, but the level of risk in each type is different. No-risk investments don’t exist. However, the fact that financial investment can easily go sideways is often ignored and believed to be almost non-existent. The risk level of investment is a non-negotiable factor to be considered before taking any active steps towards investment. Therefore, you need to know the best safe ways to invest money.

As earlier established, financial investments are not without risks but a good knowledge of the risks implies better decisions and a higher tolerance level when they occur and this is so because anticipation is the strongest element of strategy. Financial risks are described by Wikipedia as the potential for financial loss and uncertainty about their extent. Investment risks are the possibility that the investment’s return would differ from what is expected and this occurs from depreciation of value in the acquired asset instead of the anticipated appreciation.

What Is A Low-risk Investment?

Low-risk investments are investments with a small percentage chance of loss or a low percentage of under-performance. They are inherently more secure than other investment options. Bonds are of low risk compared to stocks while treasury bills are of low risk investment compared to corporate bonds. They are the most secure investments.

In investment, there are multiple risks but we will group these multiple risks under two; high-level risk investment and low-level risk investment. A high-level risk investment is most likely to incur huge returns and huge losses or extremely poor returns while low-level risk investments are those whose chances of huge returns are very low but protection of initial capital is highly guaranteed. The major difference between these two types of risks is that while the high-risk investment has the potential of making a huge return, the risk ratio is practically the same.

For instance, if the probability that the investment plan will pay is 95%, the probability that it will fail is also 95%. Low-risk investment on the other hand promises not many returns but guarantees security especially when it relates to the initial capital. For instance, the possibility of a low-level risk investment to generate a huge return might be as low as 20% but the assurance that at least one can go home with the initial capital or a little less is about 60%.

Best Short Term Low-level Risk Investments

As earlier explained, duration and risk propensity is an imperative determinant for the choice of investment options. Here are three investment options that are not only short-term investments but are also safe short-term investments.

Mutual Funds

Mutual funds just as the name implies are an investment plan where several individuals as required by the company put their money together for the investment company to purchase securities such as bonds and stocks and when these appreciate, the company sells and the profit is shared amongst the investors whilst a certain percentage goes to the company. In a very vivid illustration, the mutual fund is a situation where 6 traders bring $150 each that makes $900, then hire a salesman to oversee the importation of a trailer load of rice which contains about 600 bags. When the trailer load of rice arrives, the hired salesman equally coordinates the distribution and sales of the 600 bags of rice and at the end of the deal reports back to the traders. Assuming he sold each bag of rice for $60, that means he realized a total income of $36000.

Based on this, the income would be split according to each trader’s contribution. In this case, their contributions are equal so each of the traders will have an equal share of the income which would be $6000. From this $6000, each trader will have to give a stated percentage to the hired trader and another percentage for costs incurred during the business after which everyone is expected to go home with equal amounts of money. This is a typical example of safe index funds and this is what it is all about.

Safe mutual fund investments are low-risk investments for beginners and often a great option for anyone irrespective of class and status. It is important to note that most times, the conditions and terms applied to mutual funds are often based on the company’s preferences. However, they are guided by Federal financial laws and organizations that are in charge of regulating the activities of these financial institutions. Based on this, the degree of return and investment period is often outlined by the investment company and it differs depending on what the investment company is investing in.

There are risks attached to every investment option and mutual funds are not an exception. In case of a loss in the mutual funds, the investors bear the consequences as their funds are not insured like banks. This is why it is important to know what kind of investments the investment company is undertaking and on your own, you can calculate possible losses and brace yourself for anything. Otherwise, mutual funds are generally safe short-term investments and safe ways to invest small amounts of money. Another issue of concern is always about the transparency and availability of the investment company. Well, mutual funds companies are always registered and operate like normal corporations. This means that they are liable to punishment by the law and hence cannot act in just any manner.

High Yield Savings Account

This is another type of low risk investment on the list of safe investments. It operates more like a normal savings bank account but its interest rate is pegged at a higher rate. So, it is a low risk investment with a high return. For normal savings accounts, the incentives that apply are always minimal and are often insignificant. However, for individuals who consider the bank as the safest option for saving, this option is certainly the best safe high yield investment.  For example, in the UK, the traditional savings account interest rate ranges from 0.01% to 2.10%.

Although the profit margin might still seem way too low to be considered meaningful, this form of investment is a safe short-term investment. This is because every money in the bank is insured and based on this, the risk of a high yield savings account is virtually zero. However, there are still some downsides of opening a high yield savings account. One of them is that they are not free from taxes and other levies. It does not matter if you decide to withdraw the money or just leave it in the account, just like a traditional savings account, the taxes and fees that apply will be deducted when due although it is important to note here that the fees that apply to high yield savings accounts are not as exorbitant as those that apply to the usual savings account. Also, although some high yield savings accounts offer zero charges for monthly transactions, those free charges often have a limit and once they are exceeded, the charges will be deducted.

Again, some high yield level accounts place strict limits on withdrawal which rules out the efficiency of these accounts as appropriate emergency funds. Another con of this type of account is that they are mostly run online thereby poor connectivity and inaccessibility can be a problem. Finally, as good as high yield savings accounts sound, they can only be handled by individuals who are highly disciplined and can abide by the strict rules that govern them which often range from minimal amount deposits to strict and limited withdrawal conditions. This makes it a low risk investment for retirement.

With this, we can establish that a high yield savings account would not be appropriate for an emergency account or a low and unsteady income earner who might occasionally need money. This account is most suitable for someone with multiple and steady sources of income as such an individual would be primarily concerned with stashing away income not spending it. It is also important to note that banks vary when it comes to terms and conditions that apply with a high yield savings account and it is best to check and compare these terms and conditions to decide which best suits you. Therefore, the high yield savings account is a secure short-term investment.