How do you decide between low risk vs high risk investments? When it comes to investing your hard-earned money, one of the fundamental decisions you’ll face is choosing between low vs high-risk investments.
Investing can be rewarding given the right circumstances, but risk is always a factor that has to be carefully considered. One of the most common issues for anyone just getting into the world of investing is whether high-risk or low-risk investments are the right way to go and what the differences are.
Since risk is always present in investments, many people new to this financial area assume that it is a well-defined subject. Unfortunately, that is not always the case. Arguably, there is not always agreement on how to calculate risk, even in a Trading Review.
In this article, we will explore the world of investments by comparing the differences and examples of low risk vs high risk investments and why having a balanced portfolio is a good strategy.
Low Risk vs High Risk investments: The Differences
Perhaps the best way to think about the risk involved in investing is as the probability of an asset suffering a loss of value or performing far below expectations.
For example, as an investor, when you get your hands on an asset expecting a 10 percent return, you should understand that the likelihood of the return turning out to be below this is the risk of that particular investment.
No one doubts that risk is always involved with different types of investment options, but does this mean you should always look for low risk options as opposed to high risk ones? Let’s consider the differences before you decide between low vs high risk investments.
High Risk Investments
High risk investment options include those that come with a significant chance of loss of capital or poor performance. This definition might seem straightforward to some investors, but it can be subjective.
For example, most people would arguably consider an investment with a 50/50 chance of a successful return to be acceptably risky while others would not. On the other hand, an investment with a 90 percent chance of loss is certainly a high risk to most if not all investors.
Low Risk Investments
When investors choose low risk options, they are putting less possible loss at stake. However, this means that there is less to gain as well.
The most attractive thing about low-risk investments is the protection they afford against possible losses. This does not necessarily mean that losses will not happen but most certainly that none will be completely devastating.
Low Risk vs High Risk Investments: Examples
Risk and reward are key elements in the world of investing. To put it simply, the higher the potential reward of a particular investment, the higher the risk of losing capital and/or underperformance.
Low-risk investments, on the other hand, offer lower potential returns.
Low Risk Investments Examples
Risk can be measured by the possibility of an investment falling in value and/or underperforming relative to what the investor might expect. With low-risk investments, less is on the line, either in terms of capital or the portfolio’s value. As we mentioned, the possibility of gains is also much lower.
The great thing about low risk investment options is that investors enjoy protection against financially catastrophic results. Some low-risk investments include:
1. Fixed Deposits
A fixed deposit (FD) is a bank account that typically provides a higher rate of interest than a regular bank account. The investor must agree to lock their capital to the account for a fixed period of time to enjoy a higher return rate.
Fixed Deposits are offered by banks or NBFCs (non-banking financial companies). FDs come with the promise of stable returns and very little risk of adverse results.
2. Public Provident Fund
Public Provident Fund (PPF) is a long-term savings option for investors who want government backing and tax benefits.
A PPF account generally has a maturity of 15 years and the returns from it are not taxable under Income Tax, meaning that investors keep more of their profits. To know more about Public Provident Fund (PPF) click here.
High Risk investments Examples
Some people compare high risk investments to high-stakes gambling where you are taking on financial risk with a high probability of loss while hoping for a big return if things go your way.
Some examples of high-risk investments include:
1. Direct Equities
Direct equities are shares of a public company that investors can obtain directly from the stock market with an investment account and the help of a stockbroker.
Direct investment in the stock markets can maximize returns considerably, but the risk involved is just as considerable, so this is not for everyone.
2. Equity Funds
Equity funds or stock funds are mutual funds that focus investments primarily in stocks. Mutual funds are ideal for investors with little to no time for portfolio management while offering higher returns than FDs and less risk than typical stocks.
Check this link to know more about it: https://en.wikipedia.org/wiki/Stock_fund .
3. Unit-Linked Insurance Plan
A unit-linked insurance plan (ULIP) provides life risk cover with a market-linked investment. Part of the premium goes to insurance coverage and part is for the investment.
The investment in question can involve equity or debt funds or bonds, depending on how much risk the investor is willing to take on.
Low Risk vs High Risk Investments: Advantages of a Balanced Portfolio
Even with all the information investors can obtain about both high-risk and low-risk investments, making the right choice between the two can be daunting. With this in mind, a balanced portfolio might make more sense.
A balanced portfolio is typically one with a mix of high risk and low risk investment options such as stocks and bonds. The strategy here is to enjoy the possibility of stock market returns with a cushion to counter underperformance.
A balanced investment portfolio comes with advantages such as:
- Minimized market risk if certain investments underperform
- A built-in investment cushion
- Managing investments and risk over time can be considerably easier
Of course, minimizing risk and maximizing possible returns is not just about combining a bunch of high-risk and low-risk investment options. You have to stay on top of financial news to help you decide what investments are right for your goals and perhaps rely on a professional financial advisor.
Conclusion
Now that you know how low risk investments differ from high risk ones, you are in a better position to decide which one is right for you.
Making this financial choice greatly depends on your investment goals and how much risk you are willing to accept. A balanced portfolio that includes both high-risk and low-risk investments might be more to your liking since it balances things out nicely with a combination of stability and risk.
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