Low-risk investment options: Route to capital preservation

To ensure a comfortable financial future, investing with discipline is a powerful tool for creating wealth. When faced with an array of investing opportunities, even a conservative investor may feel bewildered. Fortunately, there are a variety of investment options that promise low risk and steady returns, allowing savers to accumulate wealth gradually without taking on undue danger.

In this post, we will look at some low-risk investment options and how they may help you grow your wealth steadily while keeping risk levels low.

Fixed deposits (FDs)

Fixed deposits or FDs are among the most popular investment options in India for low-risk investors. FDs are offered by banks and financial institutions, and they offer a fixed rate of interest for a predetermined period. The interest rates on FDs typically range from 5-7% per annum, depending on the tenure, the amount of the deposit and the type of financial institution.

Typically bank FDs which are considered safer, have lower interest rates compared to the ones offered by non-banking financial institutions. Deposits of cooperative banks are typically riskier than the deposits of scheduled commercial banks like SBI, ICICI Bank etc.

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FDs are considered safe as they offer fixed returns. Investors can also opt for a tax-saving FD, which can help them save taxes under Section 80C of the Income Tax Act.

Public Provident Fund (PPF)

The Public Provident Fund (PPF) is a long-term investment option that offers attractive tax benefits and guaranteed returns. The scheme is backed by the government, which means that the invested amount is safe and fully secure.

The current interest rate on PPF is 7.1% per annum and the investment can be made for a period of 15 years. PPF also offers tax benefits under Section 80C of the Income Tax Act.

National Pension System (NPS)

The National Pension System (NPS) is a government-sponsored pension scheme that offers low-risk investment options for individuals who want to build a retirement corpus. The scheme offers investors the flexibility to choose the allocation of their funds among various asset classes, such as equity, debt and government securities.

NPS offers tax benefits under Section 80CCD(1B) of the Income Tax Act, which makes it a popular investment option among low-risk investors. However, it is important to note that the investment in NPS is locked in until the age of 60 and withdrawals before that age are subject to certain conditions.

Debt mutual funds

Debt mutual funds are a low to moderate risk investment option that offers stable returns with minimal risk. These funds invest in fixed-income securities such as bonds, government securities and money market instruments.

These funds are managed by professional fund managers who invest in a diversified portfolio of fixed-income securities to generate stable returns for investors. The returns on debt mutual funds typically range from 6-8% per annum, making them an attractive investment option for low-risk investors.

Choosing the right debt mutual fund as per the liquidity and investment horizon is important. Liquid funds and ultra short funds are for funds which are needed in the short term. For longer term investment target maturity funds and corporate bond funds make more sense. These funds also offer the advantage of liquidity as and when needed.

While investing into credit risk funds, investor should understand the risks associated carefully.

Post office savings schemes

Post office savings schemes are regarded as among the safest investment options available for low-risk investors. The schemes are backed by the government and offer guaranteed returns. Some of the popular post office savings schemes include National Savings Certificate, Kisan Vikas Patra and Post Office Monthly Income Scheme.

The interest rates on post office savings schemes are typically higher than bank FDs, making them an attractive investment option for low-risk investors who want to earn higher returns without taking on excessive risk.

Bonds

Bonds or non-convertible debentures are also attractive fixed income options. They are typically issued by corporates and offer annual interest payout. While investing in bonds investors should look at only high-quality issuers. Credit rating is one of the mechanisms for investors to understand the quality of issuers. Bonds are typically listed but investors should be aware that the liquidity usually is far from desired. Hence, bonds should mostly be considered with a view of holding them till maturity.

Conclusion

It is crucial to diversify your investment portfolio to mitigate the risks associated with investing in a single asset class or investment option. By diversifying your portfolio across various low-risk investment options, you can achieve a balance between stable returns and minimal risk, which is essential for long-term wealth creation.

However, investors should be aware that all these investment options offer low or sometimes negative real returns as consumer inflation averages around 6-7% in the long term.

Consider the above mentioned low-risk investment options if you are seeking to prioritise capital preservation and stable returns over high-risk investments.

(The writer is chief business officer at MarketsMojo)