How do you know it’s time to take up a low-risk investment opportunity?

In life, most opportunities come at the cost of other opportunities. This is defined as the loss of other opportunities when you are faced with the situation where you can only choose one opportunity. The same goes for investment – most high-risk opportunities always seem to be more attractive because of the projected return on investment, and vice versa when it comes to low-risk opportunities.

Fundamentally, neither of the two types of investments is better than the other because they are both applicable in completely different economic environments. When a country’s economy is doing well, inflation is low and a majority of people will have more money to invest and a higher risk appetite because it is easy to recover from any bad decisions. But when the economy is struggling, inflation is often high and people tend to hold on to their savings in case that is all that is available in the near term.

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This article outlines seven low-risk investment options that can allow your money to grow even when times are tough.

Treasury securities

These are low-risk debt instruments that are offered guaranteed by the treasury to individuals and institutions in a bid to raise funds for government expenditure. Examples of these are treasury bills that are short term (within a year), bonds and notes that mature after more than a year.

In the case of treasury bills, a profit is realized in the difference that the amount that the investor pays versus what the government pays back after the predetermined period. In regards to treasury bonds and treasury notes, payouts at a fixed interest rate are made to the investor periodically until the maturity when the par value of initial investment is paid out.

Bank Savings account

Most banks and credit unions offer customers the option of opening a savings account where their funds can earn some interest. This type of account would typically have a low interest rate therefore encouraging you to deposit large amounts and leave the funds untouched for a long time. This type of account is often insured by the Federal Insurance Deposit Corporation (FDIC) up to a certain amount so your funds would be secure.

Savings accounts often have a minimum balance and recurring maintenance fees so it is important to find out all the terms and conditions before depositing.

Money Market accounts

A money market account (MMA) is a type of bank account that offers high interest rates in comparison to a checking account. It can be defined as a hybrid between a savings account and a checking account as it shares some properties of each. For example, an MMA would offer a higher compound interest rate (annual percentage yield) and allow you more flexibility in terms of withdrawals.

Additionally if your account is in an FDIC-insured institution, then your all your funds are insured up to a total of $250,000 for a single account or $500,000 for a joint account. It is very important to be keen on reading the fine print when you open such an account as the introductory interest rates may be appear attractive in the beginning, then drop after a short time.

Opening an MMA would be ideal if you are in possession of funds which you would like to earn some interest if you don’t need immediate access.

Certificates of Deposit

Financial institutions such as banks usually issue certificates of deposit which are basically savings accounts that holds a fixed amount of money for a fixed amount of time with the surety that an interest will be paid upon expiry of this period. If the investor withdraws the funds before the amount of time elapses, then a penalty may apply

This option would be great if you have a sum of money that you do not need to access over a period of time.

Fixed Annuities

A fixed annuity is a product offered by an insurance company whereby you are guaranteed to be paid fixed rate of interest on your initial investment. The difference between fixed annuities and certificate of deposit is that the investment in annuities is not subject to taxation until you decide to withdraw.

There is a bit more risk in fixed annuities in that the guarantee is only good if the insurance company does not go under.

Immediate Annuities

This is slightly different from the fixed annuity in that it grants you access to a monthly payout as opposed to longer-term payouts. When you buy an annuity, you are usually insuring a particular outcome rather than deliberately making a financial investment.

Immediate annuities work best for people who need a regular income (just like a salary would work) in retirement.                 

Stable Value Funds

These are investment contracts that are issued by banks an insurance companies to pay a specific return after a specific period. The advantage of this type of investment is that it provides quick liquidity when required and preserves your capital, as it is low-risk.

Ultimately, there are many different investment vehicles to suit your needs. It all depends on:

  •         Your risk appetite
  •         The amount of capital at your disposal
  •         How quickly you would wish to access the funds when the time comes.
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