In the world of investing, risk and reward are closely intertwined. Generally, the higher the potential reward, the higher the risk. On the other hand, low-risk investments tend to have lower potential returns. In this blog, we will explore the key differences between low-risk vs high-risk investments and discuss the pros and cons of each.
What Are Low-Risk Investments?
Risk is measured by the possibility of a decline in value and underperformance relative to expectations. Low-risk investing typically involves less stake, either monetarily or in terms of the portfolio's overall value. There is also less to gain, whether measured in terms of short-term profit or long-term advantages.
With low-risk investments, investors want to ensure that any losses they incur won't be catastrophic. Some low-risk investments are the following:
Fixed Deposits or FDs:
The risk-averse investor can benefit from fixed deposits (FDs). Generally, FDs are high on people’s to-invest list because they promise stable returns and protection of money.
Public Provident Fund or PPF:
One other low-risk investment is the Public Provident Fund (PPF), which is backed by the government and can be used for saving and retirement. It has a heightened significance for those who do not have access to a formal retirement savings plan.
Life insurance:
The primary obligation of the breadwinner is to ensure the family's financial stability after they are gone. A life insurance policy or an endowment plan is the most significant way to provide this kind of security for one's family in the future.
What are High-Risk investments?
Investing in something with a high-risk means taking a chance on it – knowing full well it might fail—either in terms of total value or performance. The former is straightforward, you may view an investment as high-risk if you're informed it has a 50% probability of generating good returns. Yet, many investors ignore the latter.
Some examples of high-risk investments are as follows:
Direct Equities:
Investors who are willing to take on more risk can choose equities. Although every asset class is vital in its own right, stocks have consistently outperformed other asset classes, such as FDs, over the long term. Direct investment in stock markets is one strategy for maximizing returns (and risk). Investing in research into businesses, industries, and macroeconomic issues takes time and effort. So, not everyone should try their hand at direct investment. If you don't have access to the stock market, don't worry; there's always the next choice.
Equity funds:
Mutual funds are an ideal option for investing in stocks if you don’t have enough time and energy to manage your portfolio. Professional fund managers are likelier to pick winning stocks for their mutual funds. Mutual funds give higher returns than FDs and offer a degree of safety that stocks do not.
Unit-linked insurance plans (ULIPs):
These are a type of endowment plan in which the portfolio's investments are tied to stock markets and you also get a life cover. If you’re willing to take risks, you can find a ULIP that fits your investment goals. The flexibility of ULIPs makes them an attractive investment option for people with a wide range of risk tolerances.
The Difference Between High- and Low-Risk Investments
High-risk investments vs Low-risk investments:
Characteristics
Low-risk investments give lower returns, but losses are also rare.
High-risk investments have the potential for high returns, but these returns are not guaranteed.
Pros:
Low-risk investments predictability can bring peace of mind; they can help balance your portfolio and protect against market volatility.
Investments with a higher potential for loss can produce higher returns over time, resulting in higher wealth creation and keeping pace with inflation.
Cons:
Low-risk investments on their own are unlikely to increase your wealth significantly.
High-risk investments are extreme, and can give very high returns but also very high losses.
Conclusion:
Now that you know the difference between low-risk and high-risk investments, you must be wondering which one is good for you. Well, it depends on your investment goals and risk appetite. Regardless, a balanced portfolio should include both high- and low-risk investments. Safer options help limit risk while providing more stability, while high-risk investments can lead to higher returns. This is why it is essential to diversify your holdings into both low and high-risk investments.
FAQs
Q. Is there a good reason to go for a high-risk investment over a low-risk one?
Although high-risk investments carry a higher profit potential, they also expose your capital to higher risk. Thus, if all goes well, investments with a high degree of risk can also yield a high rate of return.
Q. To what extent is it possible to balance risky and relatively safe investments?
The main benefit of diversification is that it helps reduce risk while opening up the prospects of more profits. You can reduce your overall exposure to risk by investing more in various types of investments.
