We all want our finances to grow and extra money can help a great deal, everyone tries saving a little aside for their future. It’s a way of securing the future and for any unexpected expenses. People like investing money to gain some extra bucks, but there is a lack of knowledge among investors about the risk and pitfalls of investing. Yes, they do provide financial security and contribute to income as well but there is a need to understand both sides positive as well as negative. This post will help you understand how low-risk investments work?
The basic notion that we have about investing is that we get high returns without facing any risk, but when it comes to investing no investment carries zero risks, but they do vary in the range, from high to low risk.
What are low-risk investments?
In low-risk investments, these are safer and are more risk optimized than the others, the only fall out is it doesn’t come with very high returns. Here chances of losing principal amount are unlikely.
There are various low-risk investments to look out for; the safe way to invest is, Bank Account, where the loss of money occurs slowly and steadily. It depends upon the inflation rate, like if your account is paying you 2% and inflation is around 1% then you are losing 1 % which is not that much. All you have to do is open a savings account in any bank branch; with interest rate applied you are getting more than you are saving. Account value does not fluctuate and there is a benefit of accessing your money at any time.
The next option that you can look out for is peer to peer lending; it’s a common platform where lenders and borrowers can involve in the process of taking loans without involving any middle man. This idea is picking up well, it’s quite popular now and is breaking many financial barriers. It comes with many benefits like it’s operated online, flexible, competitive interest rate, fast and easy process makes this lending process convenient especially at times of emergency.
The online process for applying is quite easy; all you have to do is fill an application online. As a borrower, all you have to do is mention your needs and get yourself verified by uploading documents and checking your credit score. A credit score defines your credibility of paying back. You get the loan at a low-interest rate due to high competition among lenders.
As a lender, you can browse for the borrower’s profile which suits your lending needs. Here, you can check and verify their credibility to avoid. There is a freedom of choosing and fixing terms of these loans.
If’s and buts’ of this process
These loans are more unsecured which means it does not require putting any kind of collateral as a security. These are more flexible because terms and conditions are made considering both the party’s needs. The application process is easy and is done online which means it does not require any kind of paperwork thus making it hassle-free. The only disadvantage is that the borrower has to go through a credit check to secure the loan process. There is some sort of application fees also involved.
Next on the list is a certificate of deposit (COD) that is given by the bank that promises an exact interest rate over some time like 6 months or year. There is a fine involved if you try paying before the decided period.
Treasury securities are another low-risk investment option which includes bonds, TIPS, Treasury bonds, bills, and notes. You can easily purchase these online. These usually mature in 2 to 10 years.
It comes with the feature of fixed interest rate and fixed monthly payments, fixed annuities are a good choice in terms of long term income growth. Investing in this also brings a fixed rate of return. Lack of liquidity is the only drawback that comes along with it.
Immediate annuities guarantee the monthly amount of income. There is a risk if the company goes out of business. These are best for retired people since it gives fixed monthly payments.
Another option is Stable Value Funds, which comes intending to preserve the principal. It’s quite flexible in taking out money any time you want, which makes it liquid. They provide high return rates than other investing options. In Money Market Account, these are offered by banks, comes with a slightly high-interest rate, but there is a basic requirement for keeping a minimum balance in the account to qualify for such investments.
When do you require low-risk investments?
Situations like saving money which you might not require shortly or money that you want to save for any kind of emergency in near future demands investing in such low-risk investment. It’s impractical to expect high returns since; return and risk are directly related to each other. You can measure risk by calculating the scale of 1 to 5 where 1 means safe and 5 means high risk.