Investment Options for the Most Conservative Investors

We often hear about financial experts and media talking about risk and returns which go hand in hand most of the time. Assume that Ashish invested Rs.20,000 in a mutual fund a year ago and expected a return of 20% p.a. Today the same investment is worth Rs.21,000. Was he able to get the returns he originally expected?

NO – he actually made just 5% returns over a year which indicates a poor performance. During the same period if Ashish were to invest in a fixed deposit he would have made 8% p.a.

Taking risk is inevitable

If one takes different asset classes and the expected returns it is evident that taking some amount of risk is inevitable. Let’s take a hypothetical expected returns across different investment options.

Asset Class/Instrument	Expected Return*	Risk
Government Bonds	6%	Zero/No Risk
Fixed Deposits	8%	Low Risk
Company Deposits	10-15% or higher	Low to Medium Risk
Mutual Funds	15-20%	Medium to High Risk
Equity	18-25%	High Risk
Real Estate	20-30%	High Risk
Gold	10-15%	Medium to High Risk

* These are assumptions of expected returns. These should not be taken as the sole decision for investment.

I will not try to give a fancy financial model or framework to tell you that higher the risk higher the return and lower the risk and lower the return. This is sheer common sense, so lets look at the options available for investors who are highly protective or conservative about their investments.

Investment Options for Conservative Investors

For the most conservative investors there are few investment options available if we go by the table illustrated above. However, in the practical world there are several other dynamics in play. With due respect to all financial gurus and experts, let me tell you that theories and philosophies help you understand the framework, but implementing strategies in real time is a different game altogether.

In practice you will be surprised to find conservative investors taking exposure to high risk assets such as real estate and doing well too. Some of the investment options surprisingly will include high risk assets as well.

1. Government Bonds

There is no risk involved here so the returns are the least. This works for people who have a sizable amount of savings and are more keen on ‘protection of principal’ and are happy with ‘nominal returns’. This does not suit all conservative investors, because returns are paltry and are much below the levels of inflation in India.

For example a middle class person investing Rs.20,000 can expect 6% interest payout which is just Rs.1,200 in a year. Moreover, retail investors have to approach a bank or financial institution to invest in government securities, unlike stocks or fixed deposits which can be bought or booked online.

However, if Mr.Rakesh Gupta a retired corporate executive with handsome retirement benefits invests about Rs.10 lakhs he can expect Rs.60,000 in a year, which is substantial.

If Mr.Rakesh Gupta implements a laddering strategy  need not invest Rs.10 lakh at one go. Instead he can invest Rs.2 lakhs every month over 5 months and continue this in future as well. After one year Rakesh would get Rs.12,000 as interest every month as the first, second and subsequent deposit matures. He also gets his principal back. If the interest rates move up to 7% for government bonds he can re invest proceeds to get a higher interest pay out.

2. Fixed Deposits

The returns from fixed deposits lets say are about 8% p.a. but there are risks because only deposits up to Rs.1 lakh are guaranteed by the deposit guarantee company. For the common man the returns are higher but post tax returns can be as low as 5-6% depending on prevailing interest rates. Fixed income investment options including government securities, fixed deposits and company deposits cannot keep pace with inflation. But if you build a sizable investment overtime you can expect good returns.

In the earlier example although Rakesh’s returns are poor, his cash flows of Rs.12,000 per month is definitely attractive. Obviously this quantum of investment is practically not feasible for a common man. So for smaller investors fixed deposit should just be used as a parking place.

However, if you get a lump sum or steady cash flows from elsewhere you can park funds regularly in deposits if other avenues are not feasible.

3. Company Deposits

In case of company deposits, the returns could be higher than FDs but the risks are high as well. In the 90’s and later there were several finance companies that promised 20-30% returns p.a. for deposits. These are obviously promises meant to lure people. Although people received interest for a few years, the company vanished with their investments.

Today, the situation is not as bad because there are higher disclosures and corporate bonds are regulated and rated as well. Although low returns on company deposits are not attractive, beware of someone promising extra ordinary returns, because it may be another scam waiting to happen.

4. Index ETFs and Gold ETFs

Instead of investing in stocks if you had an option to just invest in Nifty itself at different levels will you opt for it? Of course yes because we have seen enough of corporate scams, failures, frauds, etc. A wrong pick can ruin your portfolio. Where you buy more stocks to diversify the costs and time involved in managing a portfolio can be too high. The best solution is to go for a simple Index ETF by buying at different levels and holding for medium to long term. The index normally cannot have a huge downside unless the whole market and economy collapses. Even during crisis situations it may be a smart idea to buy the index.

Gold ETFs are a must if you are serious about considering Gold as an investment. Investing in index and gold ETFs itself takes care of a major part of asset allocation in your portfolio. You can invest the rest in deposits or keep them safe in your bank for emergencies.

Investing in Gold needs to be done gradually by accumulating a few grams every month or so. Like equities gold delivers good returns in the medium to long run.

5. Mutual Funds – Index Funds

People who are scary of stock markets as well as mutual funds can think of investing in simple no-brainer index funds. Index funds maintain a portfolio that closely tracks the index – Nifty of Sensex as the case may be. When you invest in these funds you can expect returns that are close to index returns.

For example if Nifty delivers 18% returns p.a. an index fund could be earning 16.5% p.a.

Remember that index investing is more superior to stock investing given that the index is made up of stocks that pass stringent entry criteria.

6. High Dividend Yield Stocks

John Bogle, a legendary investor said “If you have trouble imaging a 20% loss in the stock market, you shouldn’t be in stocks.” Equities are synonymous with risk, where you risk not only your returns but your capital invested as well. This is another risk control strategy which reduces your returns as well.

Dividend yield is your dividend divided by the stock’s current market price (or acquisition price).

Assume you bought a stock at Rs.180 and over a year the company declared dividends of Rs.9. The dividend yield for the stock works out to 5% which is reasonable.

Issues with dividend yield:

• The amount of dividend would be a paltry sum when compared to your stock price. So the yield is low as well. This does not eve match the returns offered by bank deposits. However, the appreciation in stock prices can provide you additional gains.
• Declaration of dividend is at the discretion of the company. So using dividend alone as a benchmark may not really help.

However, high dividend yield stocks can benefit you if the stock price moves up significantly. Many companies retain some earnings for expansion and investment in new ventures. If the strategy works well then you get higher returns in the form of capital appreciation (increase in stock prices).

7. Investing in a residential property

The main motivations for investing in a property is to

• Have a roof or shelter or save or rents
• Earn rental income
• Benefit from capital appreciation over a period of time

For people who can afford a down payment and have the right credentials to take a home loan, this is one of the good investment options that is safe as well. The advantage of investing in residential property is the flexibility to use it for self occupation or leasing it for a rent. However, property investments can fetch gains over the medium to long run.

One needs to be patient for a period of atleast 3 years to see significant price appreciations and increase in rentals. People who bought a property in the early part of last decade (2001-2003) would be able to get their tenants to pay their mortgage because the rentals would be equal to or higher than the loan installments. If these home owners pay off their loans in a few years, the rental earnings would be a residual or passive income every month for the rest of their lives.

Invest Options – Key Takeaway

Whether it is investments, career or life in general, people who take calculated risks to move ahead in life. Risk taking should be selective and made after adequate thought about the subsequent consequences. There are ways to manage and minimize risks. What you invest in is one part of the strategy, but the other part is about how you invest.

For instance you can invest in equities via stocks, mutual funds or ETFs. Making a smart choice out of it can help you in the long run.

Conservative investors have to explore ways to invest as discussed above and see which route is the most efficient and meets their needs. This will also require some effort to research and put efforts in identifying the best possible instruments and investment options. In addition to this you can also approach a financial advisor or consult to design a customized plan for you.