12 silly questions you've always wanted to ask about low-risk investments

“Life is what happens to you when you’re busy making other plans.” That’s what John Lennon tells his son in the song, “Beautiful Boy”. It’s also what most money managers and financial advisors will tell you about investments. Not as lyrically, but the sentiment is the same. “Your money will grow when you aren’t staring at it or clasping it too tightly in your savings or current account.”

Yet every time we, the investment agnostics, muster courage and gather the 247 documents needed to finally invest in some scheme that doesn’t resemble a pyramid, we realise how little we understand the cryptic numbers game.

Instead of sprinting away from it, this year, I adopted the fight over flight approach. I embarked on a guided journey, with the help of financial experts and my commitment to invest in serious financial bonds (bonds are relatively low risk investment securities where an investor lends money to a company or a government for a set period of time).

Earlier this month, in my desperation to invade the stock market, I got all the silly questions answered about the workings of the Dalal Street. And the very next day, I downloaded the Zerodha app, and shuddered with the same nervous energy I felt when I tried paragliding in Kamshet. I had overestimated my risk-taking abilities, only to be confronted by paralysing fear. I uninstalled the app, just like I cancelled my paragliding plans a few years ago.

Was my money going to be deprived of the growth hormone yet again?

Rafaa Dalvi, a 30-year-old marketing professional, who has been investing for over six years now, explained, “Check the low-risk options, like SIP and Recurring Deposits. I invested a small amount every month for my SIP. It didn’t skyrocket like the shares of pharmacy companies in the last year, but I definitely made more money than I would have if I just relied on bank interest. It’s a good place to start without worrying much.”

Everything you ever wanted to know about low-risk investments

I’ve already spent my savings on health insurance and LIC schemes. But people tell me they aren’t investments. Is that true?

This is a common misconception. Insurance is not an investment. Financial textbooks and experts will tell you that when you invest, your money grows over time. The wealth you get from investment can be used in any manner, but insurance is a plan or a product wherein you use some of your money to protect yourself in a particular unforeseen calamity. For example, car insurance and health insurance.

What are the investment options with the lowest risks?

Risk and return go hand in hand. For low risk, investors can look at fixed deposits, or debt mutual funds. One thing to keep in mind with investments is that the (post tax) returns of your overall portfolio need to be higher than inflation for your money to grow in value. Sticking to very low risk investments only may not give you great returns.

It is very important to earn inflation-beating returns, if not, you may not be able to afford materials and services in the future despite the savings you are making now.

Do we need to be of a certain age to make these investments?

There is no age to start investing. The earlier you start, the more you gain. The moment you start earning, you should start investing. SIP is one of the best and most disciplined methods of making wealth in the long term.

Can my bank relationship manager help me with these investment plans or do I need financial consultants?

Would you take prescription medication advice from the medical store attendant? I hope not. Treat financial advice like medical advice — only trust licensed professionals.

Bank relationship managers may suggest certain investments to you, but may not be qualified financial advisors. The incentives may also be misaligned with yours. The best approach is to sign up with a certified advisor who can guide you objectively on your investments.

Do I need to pay any commission to the distributor who sells me mutual fund schemes?

A transaction charge of Rs 150 and Rs 100 per subscription of Rs 10,000 and above by a new or an existing investor, respectively, can be levied by distributor. But the simple answer is no. For investments made through a distributor, commission is paid directly by the asset management company (AMC) to the distributor.

Is investing in gold, silver or other metals advisable?

Gold is a tried-and-tested safe haven to park your money. Generations and generations have been following this saving scheme. Typically, the value tends to go up when markets go down. I would recommend perhaps 10-15% of an investor’s portfolio to be in gold in non-physical form such as gold mutual funds, gold exchange traded funds, or as sovereign gold bonds issued by the government.

Historically, returns on gold have beaten inflation. But physical gold (jewellery) comes with its risks, including maintenance and storage costs like having a locker in the bank and so on. Factor that cost in.

If you buy silver for consumption purposes, you can look into coins or bars.

Is it stupid to invest in art if I’m not an artist and I don’t understand it?

Unless you are born with a golden spoon, and can differentiate between a Raza and a Hussain without seeing the signature, we will not recommend risking your hard-earned money here. In India, art is considered as an investment by collectors who can afford to park large amounts of money.

What’s the best form of investment if someone’s planning for retirement?

After retirement, you’ll seek a regular income, for which, fixed deposits, Post Office senior citizens savings schemes and even debt mutual funds are the perfect tools for a retirement corpus. FD and Post Office schemes sound outdated and boring, but they come with almost no risks involved. SWP is also a scheme to look into.

What’s an SWP? Can only retired people sign up for SWP?

No, you don’t need to be a retired person to invest in this, although Systematic Withdrawal Plan is most suited to those who are retiring, or need a passive income. It’s the opposite of SIP where you are creating wealth. With the SWP, you are consuming the wealth in a systematic manner.

Assume you created a corpus within a mutual fund. You park that money in a mutual fund and set up a SWP where on a predetermined date, a predetermined amount is withdrawn from that particular fund and sent to your bank account. This is suited to ensure you have fixed income credited to the bank account per month.

For instance, if you have invested Rs 50,000 in a mutual fund, and instruct the fund house to deposit Rs 5,000 to your account on the first day of the month. This means that 5,000 units are allotted to you. So, on May 1, Rs 5,000 is deposited in your account leaving you with a balance of Rs 45,000 which will continue as withdrawals of Rs 5,000 every month until the balance lasts.

SWP helps in creating a regular flow of money from investments on a periodic basis i.e. on a monthly or quarterly basis.

Would you recommend similar schemes to young people as well? Or would you ask them to take higher risks?

It’s a combination factor. Your risk-taking appetite and your financial responsibilities play a key role in determining what kind of schemes you’ll be more comfortable investing in. If someone has liabilities such as outstanding loans, or financial dependents, they may not be comfortable with risky investments. Typically a young person can begin investing with SIPs in mutual funds, and a balanced fund. Once they gather momentum and understanding on how these investments work, they can look at equity funds or stocks at the right time depending on the risk they are willing to take.

From the looks of it, SIP seems like the popular low-risk kid on the block. How exactly does it work and what are the benefits?

It’s a layered, exponentially more profitable version of a recurring deposit. SIP means a Systematic Investment Plan, where a fixed amount is invested in a particular fund as per the choice of the investor on the fixed date on a recurring basis – monthly or quarterly.

Once you set up an SIP, the system does the work for you. You don’t need to remember to invest every month. And you can start with an amount as small as Rs 100. Through SIPs, you get to harness the power of compounding (earning returns on your returns).

If you need to, you can even pause, or stop the SIP at any time. At the peak of the pandemic, I personally paused my SIPs for two months.

What’s the worst case scenario when it comes to investing in low-risk schemes?

This is a fairly safe zone. The returns from liquid funds, money manager funds, treasury bills are mostly stable with low-risk investments. However, there could still be an element of risk.

The worst that could happen is reduction in the principal investment value or a delay in payments. To counter the risk, one must have at least an amount equivalent to three months expenses parked in his or her bank account.

Diversification is also the answer. Spread investments across different types of securities that are not related to each other, so that even if some investments perform poorly, the others can make up for the potential losses.

But don’t worry, you won’t lose your hair tracking money the way you might while investing in share market.

Terms to know

Types of mutual funds: 
1. Equity Mutual Funds: These primarily invest in stocks (at least 65% of its assets). They are considered relatively high-risk and are generally recommended for long-term investments (five+ years).
2. Debt Mutual Funds: These primarily invest in fixed income securities such as bonds and government securities, etc. They are considered to have lower risk with stable returns and are recommended for short-term investments.
3. Hybrid Mutual Funds: Just as their name suggests, think of these as funds that invest in a combination of equity and debt, and sometimes even gold.

Treasury bills
It’s a way for investors to lend money to the government for a short period of time. If the government needs to raise money, they can issue treasury bills that come in three durations: 91 days, 182 days and 364 days. They are typically offered at a discount, and paid back to the investor (guaranteed by the government) at face value at the end of the tenure.