The current crisis with the second wave of Covid-19 has compelled many investors to lower their risk tolerance and become risk-averse. Moreover, there is no harm done in becoming risk-averse in times like these, with heightened uncertainties, if doing this suits your financial goals and helps you in avoiding losses in a volatile market.
Therefore, if you choose a risk-averse investment strategy, you need to resort to lowering your return expectations as well. If you are able to carefully choose the correct type of low-risk investment instruments, it would help in maintaining and improving your portfolio return whilst also keeping the risk under control, simultaneously.
Let’s look at a few investment alternatives to avoid the risk and earn a pleasing return amidst the risky conditions of the market.
There are 5 ideas in which one can lower risk.
1. Consider investing in FDs with the banks that are offering above-average returns
What makes the most popular kind of investment instruments in our country? Assured returns and high liquidity is what the answer is. Since the RBI took a decision to keep the repo rate constantly at 4%, it has resulted in the majority of the banks lowering their FD interest rates.
However, there still are a few private and small financial institutions that are still running and offering above-average returns on them. You can also consider investing a portion of your funds in these FDs offered by these banks, however, make sure that you have done a thorough risk assessment, only if it seems fine to you and is aligned with your return expectations, should you go ahead.
No bank has known to have completely failed in this country, you are allowed to limit your deposits in any bank up to Rs. 5 lakhs for surety and that’s the coverage threshold offered by the DICGC, an RBI subsidiary, in case a bank fails to do so. Do remember that the Rs. 5 lakhs limit would include any and all interest income too.
If you want higher FD returns, you can always open an account in the name of your senior citizen parents. For senior citizen depositors, usually get preferential rates up to 50 basis points over and above the normal rates.
The big banks are currently offering interest rates that are in the range of 5.5% to 6% per annum on a fixed 3-year deposit for senior citizens, however, some private and small finance banks are offering around 6.5% to 7.5% per annum. The investors also have the option of considering laddering their FDs to benefit from any high rate offers coming in the future and to reduce the risk of pre-closing an FD during emergency times after losing interest income.
2. Consider investing in short-term bond funds
The debt funds could be excellent alternatives for investors who do want to invest in FDs. Debt funds are way tax-efficient when compared to FDs as they have a higher possibility of offering a better return. As there might be chances of hikes in the interest rates in the future, the investors could opt to invest in short-term bond funds. Funds that have exposure to bonds of long-duration maturities are highly prone to interest rate risk. But with the short-term debt funds, carry lower interest rate risk as they would invest in bonds with maturities of less than 5 years, for example, government securities, commercial papers, etc. So, if you are looking for a low-risk investment option then you should consider the short-term bond funds to be a part of your portfolio.
3. Deposit a portion of your funds in high-interest savings accounts
There are several banks that are providing people with extremely attractive and affordable interest rates on their savings bank account. The investors should most likely consider depositing a portion of their funds in any of these savings accounts to maintain the minimum balance requirements among the other terms and conditions mentioned with due diligence. For example, you can keep an emergency fund in such high-interest accounts so that you can access it easily when there is a financial emergency.
4. You could invest in liquid funds or FD returns to equity funds
You may have the habit of avoiding the idea of investing in equities in the current market because of the excessive volatility; however, you definitely would not want to give up your chances to earn a higher return by investing the same in the stock market. To avoid a loss of capital, you can now invest your funds in a top-rated liquid fund or a higher- interest FD account with a minimum income plan (MIP) option systematically and you can then slowly move around your funds from them into top-rated equity mutual funds. This method would make sure that you get a higher degree of safety for your primary investment. On the other hand, if the performance of the market is decent or even beyond good, then you would be able to earn way better than to return to reinvesting the interest into an FD.
5. Apply a staggered investment approach in equity mutual funds for the long term
When you are planning on investing a wholesome amount, you may park the corpus in a liquid fund and wait for the downward correction in the stock market to gradually stagger it step by step. Whenever there is a major and noticeable dip in the stock market, you may shift a fixed ratio of the liquid fund corpus to the assigned equity fund. For example, suppose you shift 10% of the remaining allocation in the liquid fund to an equity fund whenever the stock market falls by more than 10% from the last entry-level. Assuming you get a total of five changes in a year, it means you’ll be able to shift approximately 41% of the allocation in liquid funds to equity funds. If the condition of the market keeps dropping, you may have to continue to shift along. If the market rises further, you will benefit from the rupee cost averaging and the value of your portfolio would profoundly increase. The longer the investment horizon, it would result in better the performance and reduced risk when you have invested using the above-mentioned strategy.