Different types of investments fall in the different risk-to-reward spectrum. Investors need to identify risk behind opportunities to maintain a level of safety. Analysts suggest picking less volatile stocks because they offer higher returns in comparison to more volatile stocks. Investors can pick such stocks on the basis of the risk level.
There are several types of risks involved in an investment such as Systematic risk, Legislative Risk, Political Risk, Market Risk, tax risk, and others. External influences also affect the prices a lot. For example, an IPO can be largely affected by external factors. In the same way, a number of variables determine the profitability of an investment.
Many of the investors are conservative investors who want to grow their money but prioritize the preservation of capital. There has been an era where fixed deposits offered higher returns without any risk factor. Since the interest rates have been following a downward trajectory, investors need to look for stocks with higher returns and lower risk. Understanding of the risk spectrum will help you to decide the right stock for you.
The Spectrum of Risk
The potential rewards of investment are directly correspondent to the risk involved in it. The following classification of the risk-to-reward spectrum will help you to choose the right investment for you:
- Safe Investment with Low Return: Certificate of Deposit (CD), savings bonds, life insurance.
- Moderate Risk Stocks: Preferred stocks, income mutual funds, and utility stocks.
- Medium Risk Stocks: Equity mutual funds, blue-chip stocks.
- High-Risk Stocks: Small and mid-cap stocks, mutual funds that invest in technology and energy sectors, small-cap funds.
- Speculative but Superior Return: Oil and gas industry stocks, derivatives, penny stocks.
If you want stocks delivering returns with less risk, you can consider preferred stocks, income mutual funds, and utility stocks. You will require an online Demat account and online trading account with a broker to invest in these stocks. Bajaj Financial Securities Limited Demat account is a good option as it offers a low-cost brokerage solution along with a fast and secure trading platform.
Let’s discuss these low to moderate risk stocks.
Low To Moderate Risk Stocks
- Preferred stocks
Preferred stock (preference shares) is equity that represents an ownership stake of the stockholder in a company. Investors prefer these stocks because of higher and fixed dividends. Preferred stockholders are paid dividends on a priority basis. They are paid before common shareholders. They do not have voting rights.
You can invest in preferred shares in the same way you invest in common shares through a Demat account with a brokerage firm.
- Income Mutual Funds
There are two types of Income mutual funds –
Medium to the Long term where Macaulay Duration is between 4-7 years.
Long Term where Macaulay Duration is more than 7 years.
Income mutual funds managers manage the investment portfolio actively and try to offer returns even if interest rates are declining.
- Utility Stocks
Utility stocks are a destination for conservative investors. Utilities are one of the safe investment options but interest rate-sensitive. These are the stocks of the utility industries i.e. water, electricity, gas, alternative energy producers, and others. These are the long-term holdings. Investors buy utility stock for their dividend income and stability.
The Bottom Line
Low-risk investors should consider the less volatile stocks and long term stocks to achieve their goals with higher returns. To ascertain whether a stock is good or not, check the past performance of the stock, the current performance of the business, and the expected performance of the business (in the next 5 to 10 years).