A risk-averse investor is someone who, irrespective of where the market stands, is always more focussed on the preservation of the principal amount over the possibility of a higher return on the money. And since they prioritise the principal amount, regardless of the market conditions, they prefer liquid investment, so that they access their funds as and when they want to. In investment, taking risk is, more often than not, directly proportional to the returns a person makes. The other way of looking at it is that risk in investments equals price volatility, which can carry two possibilities — of making the investor rich as well as eating up all the savings.
And since we are talking about conservative or risk-averse investors, here are a few market and investment strategies for them.
1) Fixed Deposit
When you think of a risk-averse investor, the first investment destination that strikes your mind is a fixed deposit or an FD. Not only are there assured returns and safety of your principal amount, but FDs are also considered highly liquid. The primary feature of this investment instrument has always been the preservation of an investor's principal amount. That, of course, doesn't mean the returns aren't good. Some of the banks offer an interest of up to 6.5 per cent on FDs.
2) Provident Fund
An investor with a low-risk appetite or even one who is just entering the market can straightaway think of investing in a provident fund, the primary objective of which is to prepare for long-term needs or retirement. Besides the investment amount qualifies for tax deduction under Section 80C. The interest earned, as well as the money received at the time of maturity, is also exempt from tax, giving this investment instrument an edge over others.
3) National Savings Certificate
The next on the list of safe and secure investment tools for a risk-averse investor is the national savings certificate (NSC) scheme. It comes with a 5-year lock-in period and offers an interest rate of 6.8 per cent p.a. The interest rate for the NSC is reviewed every quarter. As far as liquidity is concerned, loans can be borrowed against deposits in NSC. While you can start an NSC scheme with an amount as low as Rs 100, there's no limit to the maximum amount. Under section 80C of the Income Tax Act, an investor can claim deductions of up to Rs 1.5 lakh on NSC investments.
4) Stock market
As far as the stock market goes, experts advise investors with low-risk appetites to reduce exposure to equities. Not just that they also suggest a conservative investor should avoid investing in small and mid-cap companies. However, if they want, they can invest in large-cap companies. Due diligence and caution are the two mantras that drive a risk-averse investor's investments and therefore they must keep that in mind even while thinking about investing in large-cap companies.
5) Savings account
The simplest and easiest thing to do for a conservative investor who doesn't like taking any risk is to open a savings account with a bank that offers a reasonable interest rate. Several private banks offer attractive interest rates. So, apart from keeping your money safe irrespective of market conditions, savings account also assures you of return. The other advantage is that you have complete access to the money without any hindrance.