Investment involves taking a risk with the intention of earning extra income or capital gains from the money invested. Cautions people are risk-averse investors who aim to minimise the risk and to maximise the returns on capital investments. This will restrict their investment choice to low risk or risk-free, and low return investment bonds. This article will detail out information about the types of investments which are available for cautious people.
Investment vehicles for cautious people
Cautious people are very sensitive to the risk attached to investments. Therefore, bond fund is suitable for their investment needs because they have a lower risk and are highly liquid as compared to other investment vehicles such as money market and stock market. The types of investments available on the bond market are: Government bonds Government bonds are regarded as low risk or risk-free investments, because they are secured by the State. This means that the investor is guaranteed to get his money back, plus a pre-determined interest or capital gain at maturity. The bonds issued by the government are treasury bills, treasury bonds, treasury notes and Treasury Inflation Protected Securities (TIPS). The return on each bond varies but basically, the extra income is very low which can be equated to the low or no risk characteristic. Mortgage bonds This bond is secured by real property such as equipment, which renders them risk-free because in times of default, a bondholder has a claim to the collateral property. They are risk-free but yield low returns. Municipal bonds They are issued by the municipality or the local government, and they are highly liquid and have flexible investment terms. The risk of municipal bonds is very low as compared to the risk of investing in corporate bonds or money markets. Corporate bonds Cautious investors reluctantly consider this type of bond, especially junk bonds, because the investment risk is relatively high as compared to other bonds. In fact, their riskiness is determined by the balance sheet of the issuing company.
Investment strategy for cautious people
Comparing risk v/s returns Cautious people always compare the investment risk to the gains. Thus, they mainly focus on investing in low risk and risk-free securities. They always seek financial investment advice on investment services. Diversification Good investment entails maximising returns and minimising risk, which can be achieved through diversified investments. This entails balancing off high risk and high returns securities such as money and stock market to counter low risk and low returns securities like bonds. Long term investment Cautious people can maximise capital gains and returns through long term financial investment in stocks.