An investor has numerous investment options to choose from, depending on his risk profile and expectation of returns. Different investment options represent a different risk-reward trade off.
Low risk investments are those that offer assured, but lower returns, while high risk investments provide the potential to earn greater returns. Hence, an investor’s risk tolerance plays a key role in choosing the most suitable investment.
Banks today provide a range of investment options, including international investing, investing in commodities, stocks, bonds, precious metals and investment funds.
Stock Options Explained
Other options for investing include certificates of deposit, futures and investment clubs.
All investment options have their inherent risk and benefits. For instance, international investing is prone to social, political, economic and currency risks, while fixed income investing is prone to interest risks.
Types of Investment Options
Here are some popular investment options and their inherent benefits and dangers:
Cash and Fixed Interest: Termed as conservative investments or “low risk/low return investments,” these provide assured returns.
However, the shortfall is their exposure to inflation. That is, the returns could be completely wiped out owing to the erosive impact of inflation on money.
Investing in cash or money market funds may get you higher returns.
Bonds: Bonds represent money that an investor lends to a bond issuer. The issuer may be the government or corporate bodies.
While corporate bonds typically offer greater returns, they also represent higher risk. In case the company declares bankruptcy, the bondholders may not be repaid the principal invested.
Hence, those with low risk appetites should opt for government bonds, which offer assured returns and regular income.
Equities or Shares: The stock market offers the opportunity to enjoy very high returns. However, it also exposes investors to high risk.
Having a long-term horizon can minimize the risk, since the stock market is volatile in the short term. Investors can either invest in individual companies or across different companies through equity mutual funds, which are managed by professionals and do not require an investor to conduct extensive research.
Diversifying your investment portfolio to include the main asset classes (bank deposits, bonds, shares and property) can give an investor a better risk-returns profile.
An investor can hire the services of a professional investment manager to organize his investments and update the portfolio.