Financial experts and market watchers always emphasize the importance of mitigating risk whenever investors are organizing their financial portfolios. Be it old investors or new, people are confused about the best investments to pursue, considering that every invest option has a different risk return profile. In that regard, diversification is an essential aspect of investing. Usually, financial advisors’ recommendations take into account the risk return profile of each asset classes, as well as the individual’s appetite for risk. Based on the client’s risk profile, financial advisors recommend an asset allocation strategy with the objective of maximizing returns for the given risk profile.
To make the most of what markets have to offer, here are 5 instruments that investors can choose from:
1. Investing in domestic equities
It is a financial asset that needs no introduction, as stock market indices and companies listed on them are covered every day by all business and financial news publications. Direct equities are often chosen by investors to buy and sell shares on the markets during trading hours. One can trade shares of any company, of a particular quantity, based on the money that they have at their disposal. Similarly, investments can also be made via mutual funds, where a diverse combination of stocks will provide returns in the long term. Investing via the mutual funds route is generally considered to be a safer bet as compared to direct equities given that funds typically invest in a basket of 25-50 stocks which diversifies risks and is managed by a professional fund manager with years of experience,
2. Fixed income securities as a low-risk alternative
For investors who are averse to high-risk investments, fixed income alternatives could be a viable option. Ideal for retirees and those who wish to save more without getting involved in speculative instruments, fixed interest rates ensure more predictable returns as compared to equities. Within fixed income investors have a wide variety of options to choose from including government and corporate bonds, fixed deposits, fixed-income mutual funds, etc. In case of corporate bonds, secured bondholders will get paid back first before other shareholders even if a company goes bankrupt. Diversifying investments through government bonds can be beneficial and reliable, as they are backed by sovereign guarantee and the risk of default is virtually negligible.
3. Gold investments during times of uncertainty
As an asset class, gold has always appealed to Indian investors. The millennia-old tradition of buying gold continues to this day, as it allows investors to maintain the asset as a security instrument, while many families retain gold assets across generations. Interestingly, the alternatives for investing in precious metals have increased over time. We now have Gold in electronic form through Gold bonds, Gold ETFs, gold coins, bars, etc. Gold ETFs are now being traded even on digital payment gateways and they hold the same value of purity as the purest form of gold. Moreover, they can trade as low as one gram of gold to get started. Beyond the various forms of purchase, gold acts as a hedge against inflation and is considered a go-to option in times of economic uncertainties like the global financial crisis or the current COVID-19 pandemic. If you take the prices of gold over one decade into perspective, they have largely increased in value, which indicates its worth for the long-term.
4. Investing in international equities
It is common knowledge that indices in the U.S. like NASDAQ 100, NYSE, Dow Jones Industrial Average, etc., provide an opportunity for diversification while at the same time providing similar or better returns to Indian equities. For instance, if we compare the Dow Jones and BSE Sensex over a 10 year period from 2010 to 2020, the Dow Jones gave returns of 196%, while the BSE Sensex gave returns of 150% during the same period. However, questions usually arise about the top stocks remaining out of reach for the average Indian investor. For such scenarios, fractional trading is an option even for retail investors, wherein, an investor could own a fraction of one share, by investing 1$ and above, with an upper limit of $250,000, set by RBI.
The U.S. being a hub of tech innovation and new-age services, stocks perform well in the long-term, while simultaneously opening access to other international markets as well. Usually, asset allocation funds and some types of mutual funds provide access to Indians to invest in U.S. stocks. They also have the choice of investing with either rupees or dollars, but picking dollar investments could be wise, owing to the positive exchange rate in favor of the dollar over the last many years.
5. Securing the future through investments in Insurance
Investing in insurance is one of the safest bets when it comes to managing a financial portfolio. Any untoward incidents or life-threatening health ailments can be tackled securely, as insurance protects people from high medical expenses. Even in terms of taxes, investing in insurance could be a boon, as the benefits from them do not get taxed. Term insurance or health insurance, is helpful to both the individual and his family in the long run, as livelihoods are catered to. Furthermore, there are several plans offered by different insurance service providers, and the monthly premiums are often affordable for working professionals to build over time.