Investors often find themselves at cross roads while going through the various investment options. One can often get stuck between high return investment optionswith vast number of risks and a plan that offers maximum security but very minimal returns. This can especially be true for amateur investors. But the good news is that there are actually several investment options that offer you impressive returns with reasonable levels of risk.
Risks can be at various levels and are directly proportional to the potential of the plans. Most high return investment plansrequire high risk acceptability on the part of the investors. With low risk investment plans, there is no doubt that your money will be safe but you won’t be able to yield much returns.
The plans vary in the degree of risks. The degree may range anywhere from minor fall in the returns to very high risks where you can lose even your entire principal amount.
The different types of risks are:
Market Risk: Refers to a risk where the money invested can lose its value in the market (applies to equities and to fixed-income investments)
Interest Rate Risk: Refers to risk of the investment losing value due to the reduction in interest rates. (applies to fixed-income investments)
Reinvestment Risk: Risk that result in maturity amount being invested at a lower rate. (applies to fixed-income investments)
Political Risk: The risk of foreign investment losing value due to any political activities in the country. (holdings located in developing countries are vulnerable to this risk)
Legislative Risk: The risk of devaluation of investment and its benefits due to new legislation. (all investments are subject to this risk)
Liquidity Risk: The risk that an investment will not be available for liquidation when it is needed (applies to fixed-income investments and real estate and other property that may not be able to be quickly sold at an equitable price)
Purchasing Power Risk: The risk of devaluation of an investment in terms of purchasing power due to inflation (applies to fixed-income investments)
Tax Risk: The risk posed to an investment and its returns due to taxes levied on them(most investments are subject to this risk)
Following are the spectrum of risks along against different degrees of risks and the plans that fall under them are as follows:
· Safe/Low Return: CDs, treasury securities, savings bonds, life insurance (from highly rated carriers)
· Very Low Risk/Return: Fixed and indexed annuities, insured municipal bonds
· Low Risk/Return: Investment-grade corporate bonds (rated BBB or higher), uninsured municipal bonds
· Moderate Risk/Return: Preferred stocks, utility stocks, income mutual funds
· Medium Risk/Return: Equity mutual funds, blue-chip stocks, residential real estate
· High Risk/Return: Small and mid-cap stocks, small cap funds, and mutual funds that invest in certain sectors of the economy, such as technology and energy
· Speculative/AggressiveReturn: Oil and gas investments, limited partnerships, financial derivatives, penny stocks, commodities
With different set of benefits available for various plans, investment planning need to be done carefully as the returns and benefits are subjective to each investor’s financial condition and goals.
Click to read more about different investment options available in India.
About HDFC Life
HDFC Life, one of India’s leading private life insurance companies promoted by HDFC Ltd. & Standard Life Ltd., offers a range of individual and group insurance solutions.
