Tuesday, February 12, 2013

Financial Advisor Strategies: Understanding Low Risk Investment Options

When you're considering your investment options you must consider the risk you are prepared to take and it is highly advised that you consult with a financial advisor. Cash and Bonds are the lowest risk assets classes.

Cash is low risk asset class and so, in general, the funds invested in cash will not see a fall in value through the investment period.

In exchange for this security however you should only expect to receive very low rates of return on your investment.

Given the low rate of return, quite often you will find that the rate of inflation may be running higher than the cash deposit rate. In this situation while the value of the cash may not fall, the true value of the money or purchasing power will decrease and so provide negative real returns.

The advantage to cash investment is that it tends to be the most liquid form of investment and therefore it is easily accessible. Typically cash investing would be used to provide for your emergency funds and your day-to-day funds.

Cash investment is predominantly carried out through Banks using deposit and current accounts.

Bonds

Bonds are typically considered low to medium risk depending on the type of bond that you invest in. However, there are also high risk bonds available and so careful analysis of the type of bond you are investing in should be carried out.

What are bonds?

Bonds can be described as loans given to a Corporate or Government body for a set period of time after which the principle amount is paid back in full. The issuer of the bond may undertake to pay a rate of interest on the principle amount. This is can often be known as the coupon rate. Obviously the higher the coupon rate, the higher the returns will be on your investment.


However, you should be wary of bonds offering very high coupon rates as the higher the risk of the bond issuer defaulting on the repayment of the principle will be.

Bonds can be described as relatively liquid because you can buy and sell them on the open market. However, depending on the time of the sale, it is possible to lose money in selling the bonds.

Given the relatively low nature of most bonds the returns are likely to be modest at best and therefore you are not likely to see the huge returns on your investment.

On the flip side of this you are unlikely to see massive negative returns on this kind of investment particularly if held until the maturity of the bond.

As mentioned bonds can be volatile depending on the bond that you invest in and therefore there is need for careful management when investing in this asset class. Bonds can however form an important part of any investment strategy.


1 comment:

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