Many people are still afraid to invest their money because of the risk associated with it. They tend to stick with the usual savings account due to its relatively safer nature.
But if you’re one of those who want to try investing for higher returns, there are low-risk financial instruments ideal for conservative people without hiring a financial advisor.
Here are 5 ways to invest in low-risk, high-return schemes:
1. Dividend-paying stocks
In the US, the typical interest rate for a savings account is 2% per year. This isn’t much if you consider that the gains are taxable.
Investing in stocks that regularly pay dividends can be more rewarding than letting your money sit in a risk-free investment like a bank savings account. For example, the pharmaceutical giant GlaxoSmithKline (GSK) pays on average a dividend yield of 6% a year – that’s three times the interest you earn from a bank account.
Aside from the cash dividends, you can also benefit from selling the stock for capital gains. Combining this with the dividends you receive gives a high chance of outperforming the gains from the usual savings account.
Furthermore, an excellent advantage of dividend investing is the ability to reinvest the interest. Over time, this compounds your wealth and the results are staggering. Using a compound interest calculator can show you how much you will make over how many years.
Dividend-paying stocks aren’t completely risk-free, but they present lower risks because their prices tend to be less volatile. Companies that provide cash dividends are usually established corporations with a solid presence in the market. Buying the shares of these listed companies is ideal for long-term investors looking for an asset with low risk and high returns.
2. Preferred stocks
As the name implies, preferred stocks are shares with higher priority compared to common stocks in getting dividends and asset distribution.
Before dividends are given to common stock shareholders, they’re divided first among preferred stock shareholders. The dividend income for preferred stocks is also more predictable as it can be fixed or be based on a benchmark interest rate. On the other hand, dividends on common stocks are paid at the discretion of the Board of Directors; the Board has the power to reduce or eliminate the dividend payout.
In the event of asset liquidation, preferred shareholders are given priority over common stockholders. Also, in the instance that dividends are suspended, preferred shareholders are entitled to receive payment in arrears before the payout is resumed for common shareholders.
Preferred shares have the advantages of both stocks and bonds in terms of flexibility and income stability. They present lower risks compared to common stocks and have higher returns when you consider the dividend payout.
A bond is a form of debt wherein you become the creditor lending money to a private company, a municipality, or the US government itself. In return, you get the amount returned in full, plus interest upon maturity. An entity usually raises a bond to boost funding for projects or clear other debts.
The US Treasury department offers several types of bonds, with Treasury Inflation Protection Securities (TIPS) posing the lowest risk. With TIPS, you can choose to avail the fixed-interest rate or the inflation-protected bond.
The fixed-interest rate presents a steady and guaranteed interest rate for the length of the bond. On the other hand, the inflation-protected bond provides an interest that grows along with the annual inflation rate.
The US Federal Government itself also offers US Savings Bonds which are similar to TIPS. The chances this investment scheme will default is almost insignificant which makes it very attractive to conservative investors.
To fund projects, the local government sometimes borrow money from the public through municipal bonds. Also called ‘munis’, this investment product is usually tax-free and has a very low risk of defaulting. They’re ideal for low-risk investors looking for a safe bet in the market.
Corporate bonds, on the other hand, is a debt security that isn’t guaranteed by the government. However, it’s still considered low-risk because it’s backed by the company’s ability to repay using its future profits or by its assets as collateral.
Whichever type of bond you choose, they’re low-risk investments with returns that are good enough considering their maturity period. If you have the patience to wait for years to realize the ROI, bonds are one of the safest bets you can invest in.
4. P2P Lending
Peer-to-peer lending has been gaining ground as more online platforms appear with better security features in place. P2P lending is popular among micro-business owners who may have a hard time getting a loan from banks. On the other end of the equation, individual investors who have money to spare can quickly churn their money for quick gains from the short-term lending scheme the system provides.
On a P2P online platform, borrowers can apply for loans by posting details on how they’ll be using the funds. Investors can then choose from the posted loan applications which to fund and add to their portfolios.
Borrowers benefit from the lower interest rates compared with bank loans, while investors earn more than the gains from a typical savings account, with an average return rate ranging from 5% to 8%.
P2P lending isn’t completely risk-free, but platforms like LendingClub screen loan applicants to ensure they can pay the amount they’re asking for. Aside from this, you may view the credit score, income, credit history, and debt-to-income ratio of the borrowers, so you can better screen who to entrust your money with.
5. Mutual Funds
If you’re not confident in buying individual shares of listed companies, but still want to benefit from the gains that stocks can give, you can opt to invest in a mutual fund. A mutual fund is a scheme where money from individual investors is pooled into one large fund. The fund is managed by a professional fund manager who invests it into various securities like bonds and stocks.
A mutual fund is an affordable and low-risk method to diversify your portfolio since the money is invested in different securities. It’s also liquid as you can redeem shares anytime you want to. You’ll also have the confidence that your money is in good hands since it’ll be handled by a professional who will do the research and monitoring for you.
Every investment has a risk associated with it, which is why you should thoroughly study the options you have before putting your money in any of them. Due diligence and risk management are the keys you need to minimize risk and exponentially grow your account. It’d be to your advantage to invest in yourself first and be more patient in working your way toward your financial objectives.