All those who enter the financial markets tend to get the most profit with the least risk from these markets. But risk is an integral part of any investment and cannot be ignored. Each method of investment has its own risk, and people should choose an investment option that has the highest return according to their strategy and risk tolerance.
Depositing in a bank is one of the easiest ways to invest, which is among low-risk investments. But not necessarily the best investment. Many people think that investing in stocks is one of the risky investment methods, that’s why they refuse to enter this market. Note that the key to success in any investment is risk management. The stock market has provided conditions for investors who do not have enough time and knowledge to participate in this market to experience a safe and comfortable investment. In fact, due to these conditions, investors can benefit from a secure profit while enjoying low risk. In the following, we will try to introduce suitable methods for investing with low risk. To learn these concepts properly and fundamentally, we suggest you to participate in the trading psychology course of Rahvard Academy.
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What is meant by risk?
“Risk” literally means “danger”. But we must know that risk does not only include risk and negative meaning. Risk expresses uncertainty about the future. Sometimes you may be in a risky position with an investment, but you may encounter positive opportunities. Therefore, risk is the possibility of loss in the future and can have two positive or negative dimensions. The concept of risk in investment is one of the basic and very important concepts in financial management. Risk is divided into two categories: systematic risk and unsystematic risk.
Systematic risk is caused by developments and events that happen in the market and the macroeconomic level. This risk is not specific to a specific company or industry and affects the entire market. Systematic risk is a part of every investment and cannot be eliminated; Among the systematic risks, we can mention inflation, embargo, war, interest rate, etc.
Another investment risk is unsystematic risk. This type of risk is caused by the characteristics of the company and the events that occur in it. This risk is specific to a company or industry. Unlike systematic risk, this type of risk can be eliminated or reduced. You can reduce unsystematic risk by diversifying your investment portfolio.
As we said, unsystematic risk is affected by news and important events of a company or industry. For example, when a company’s feed rate increases, it will have a negative impact on the company’s profitability and ultimately its stock price. Among the unsystematic risks, we can mention the change of petrochemical feed rate, change of fuel rate of cement companies, change of car import tariff, etc.
What is meant by investment risk management?
Risk is one of the integral aspects of investment in financial markets and risk management is also the key to success in this investment.
In “Risk Management”, possible risks of each investment are identified and evaluated, then by using appropriate resources, they minimize the possibility of these risks affecting the investment.
Risk management with the help of conscious actions has a great effect in reducing the harmful effects of financial activities.
What is meant by low-risk investment?
Due to the inflation conditions that exist in our country, maintaining the value of people’s capital is of great importance. In such a situation, low-risk investment can be a suitable lever to preserve the value of the capital, without damaging its principal. Many people who enter the financial markets tend to experience low-risk investing. But some of them may be mistaken in understanding the concept of low-risk investment. A low-risk investment is an investment that maintains the capital’s value against inflation while preserving the principal.
The relationship between risk and return in investment
In any investment, risk and return have a direct relationship; That is, to have a higher return, we must accept a higher risk. Of course, accepting high risk will not necessarily lead to benefiting from higher returns. In many cases; Upon entering a high-risk financial market, people’s capital is lost and there is no hope for profitable days. Therefore, the relationship between risk and return in investment should be reasonable. Sometimes people prefer to save their capital in the form of bank deposits to experience less risk. Although the risk of this method is very low, but its efficiency also decreases in the same proportion; Therefore, the best type of investment is a situation where a logical balance between risk and return is created and so called “the profit is worth the risk”.
Types of low-risk investment methods
People who are risk averse or have a low level of risk tolerance prefer to invest in areas that have very little risk. In the following, we mention some low-risk investment methods.
investing in bank
As we said, in investment, the value of the capital is preserved while guaranteeing the principal of the capital. Therefore, one of the methods that can be considered as a low-risk investment is depositing in a bank. In fact, depositing in the bank preserves your capital with very little risk and pays you interest at a certain rate, monthly, annually or…
The bank interest rate is variable and is determined by the central bank. If the inflation rate is low or investing in other financial markets is associated with a lot of risk, depositing in the bank can be considered a suitable option for low-risk investment.
Investing in mutual funds
The stock market is one of the best investment methods. Although investing in this market has a high risk, it has a high return potential. During the last few years, the stock market has been the most profitable for investors. Today, new financial instruments have been introduced to this market, which allows investors to minimize the risk of their transactions while enjoying high returns. In the following, we introduce some of these methods.
Investing in a fixed income investment fund
Mutual funds are one of the financial instruments in the stock market that help you reduce your investment risk through indirect investment. There are different types of investment funds, each of which has its own advantages.
Investment funds with fixed income are considered the best option for low-risk investment , which provide better investment conditions for investors in terms of risk and return. These funds allocate at least 70% and maximum 90% of the assets from the sale of fund units to fixed income bonds in order to minimize the investment risk. On the other hand, they invest the rest of the fund’s assets in stocks to increase the yield of the fund as much as possible. The profit from investing in these funds is either deposited into the investor’s account or included in the price of the fund units. This method is suitable for people who are interested in investing in the stock market, but do not have enough knowledge, skills and time to participate in this market.
Investment in stock investment fund
Stock investment funds or equity funds are a type of mutual investment fund that allocates most of the assets from the sale of fund units (at least 70%) to the purchase of shares of listed and over-the-counter companies and invests the rest in fixed income bonds and bank deposits. to moderate the risk of the fund. The risk and return of the stock fund is higher than that of the fixed income fund. If you have a long-term investment strategy, investing in these funds can be suitable for you. The high liquidity of the stock fund can reduce your investment risk.
Investing in a mixed investment fund
In terms of risk and return, the mixed investment fund is placed between fixed income and equity funds. These funds allocate almost half of their assets (variable between 40% and 60%) to buying shares of listed and over-the-counter companies and invest the other half in fixed income bonds and bank deposits in order to create a balance between the risk and return of the fund. Mixed investment funds do not have a guaranteed profit, but due to having a liquidity guarantor, they have high liquidity, which reduces investment risk.
Investment in real estate fund
Real estate fund is one of the indirect investment methods. This fund enables buyers to benefit from the lucrative real estate market with their small capital. The investment portfolio of this fund includes real estate-based assets that have “certificates of completion” and are located inside the country. The units of these funds can be traded in the stock market. High security, low initial capital, high yield and low volatility are among the advantages of this method.
The thing you should pay attention to is that these funds are limited investment funds; That is, the issuance and cancellation of fund units must be approved by the fund manager. Also, due to the time-consuming nature of real estate sales, the liquidity of these funds decreases to some extent.
Investment in land and building fund
The land and building fund is a type of joint investment fund that invests the funds received from investors in construction projects with residential, commercial, administrative, etc., and divides the profit from the progress of the project among the investors in proportion to the nominal price paid. Note that investing in non-construction projects such as manufacturing or service projects is not possible for these types of funds. The land and building fund units are tradable over the exchange, and at the time of sale, in addition to the nominal price of each unit, the interest that has accrued to it until that moment will also be received by the seller. Land and building funds provide the possibility for investors to invest in the lucrative real estate market with their small capital and benefit from the returns of this market in proportion to the capital they bring.
Another remarkable thing about these funds is their partnership; That is, the investors share in the profits and losses of the project, and in case of failure of the project, this loss will also be directed to the investor. Although the probability of this happening is very weak; Because these funds must receive the necessary permission from the stock exchange organization under certain conditions. On the other hand, the implementation of the project is closely monitored by the stock exchange organization. So there will be very little risk to it.
Investment in gold investment fund
Gold investment funds are one of the tradable funds in the commodity exchange, which is considered one of the best and most common methods of investing in gold. The gold investment fund provides the opportunity for investors to entrust their capital to experienced and familiar people in the gold market and experience the lowest risk in investment while enjoying the gold market yield. The managers of this fund invest the major part of the fund’s assets in gold-based securities and allocate the rest to fixed income bonds. The advantages of this method include the possibility of investing with little money, lower fees compared to buying gold physically, and the Central Bank’s guarantee from the gold fund.
Use of dedicated cartography
One of the low-risk investment methods is the use of proprietary portfolio management. With this method, you can leave your investment portfolio to experienced and knowledgeable people to reduce your investment risk. Due to their experience and knowledge, these people are familiar enough with the behavior of shares in the stock market, so they can form your investment portfolio with the information they have about your goals and risk-taking level.
Investment in bonds
Buying shares is also one of the low-risk methods of investment that guarantees the principal of the capital. Bonds are securities with a fixed maturity that are offered at a nominal price. The holders of these bonds share in the profits from the projects of the supplier company, relative to the nominal price and duration of participation. The holders of these bonds receive interest based on the nominal amount paid, in certain time periods, and this interest is sometimes paid on accrual basis and sometimes as a fixed amount. After the maturity of the bonds, the principal amount is deposited into the investor’s account and the relationship between the investor and the bond issuing company ends. Please note that having bonds does not mean ownership of a part of the supplier company and will only participate in the interests of the company until the maturity period.
Investing in Islamic treasury bonds (Akhza)
Islamic treasury documents are one of the financial instruments in the stock market, which are debt in nature; That is, the government uses these documents to pay the debt or compensate the budget deficit. These documents have a fixed interest, and considering that the payment of the principal of the documents and the related interest is one of the government’s priorities, there is a great demand for its purchase. This issue has increased the liquidity of Islamic treasury documents. Having a stock exchange code is required to buy these bonds. You can buy these bonds through the brokers’ trading system.
Investing in the housing market
Investing in the housing market is one of the traditional methods of investment that has always been customary among the people of our country. The housing market is one of the financial markets that usually has a positive trend, but sometimes it may stagnate. Considering the inflationary conditions of our country’s economy, housing prices are always growing, so the value of your capital will be preserved against inflation. However, investing in this market has limitations and disadvantages, including the following:
- Investing in this market requires a lot of capital and you cannot enter this market with low capital.
- Due to high housing prices, the liquidity of this market is very low.
- Government decisions can affect housing prices.
- The growth of housing value is unbalanced compared to the location.
So if you have a lot of capital that you don’t intend to cash out soon and your vision is for long-term investment; Investing in real estate can be considered as one of the low-risk investment methods.
Investing in the gold and coin market
Investing in gold and coins is another old and traditional way of investing. Usually, the gold trend is a positive trend in the long term. Of course, due to the fact that the price of gold is affected by the global price of an ounce and the exchange rate, with the price changes of these two factors, the price of gold will also fluctuate. If you have a long-term vision for your investment, investing in this market can be a low-risk investment, especially with the current inflation conditions and the significant increase in the dollar rate.
An important point in choosing a low-risk investment method
Many people, for various reasons such as not having enough knowledge, experience and time, prefer to experience a low-risk investment in order to preserve their capital. As we said, risk and return usually have a direct relationship, and as risk decreases, investment return also decreases. Paying attention to the inflation rate is one of the most important factors that you should pay attention to in choosing a suitable investment method. All the methods mentioned in this article can be considered as low-risk investments, but the returns of each of them are different. Therefore, you should choose the best method according to your investment goals, risk level and capital amount. In addition to the mentioned items, you should also pay attention to whether the return of your investment method is higher or lower than the inflation rate. Sometimes, the rate of return on investment may be favorable from your point of view, but because this rate of return is lower than the inflation rate, the value of your capital will decline in the long run. For example, currently, the annual interest rate of Treasury bills is between 21 and 23 percent, but the inflation rate has exceeded 40 percent. Therefore, buying these documents will reduce the value of your capital in the long run and, as a result, reduce your purchasing power.
In the current economic situation, which is an inflationary economy, everyone is looking for a way to preserve the value of their capital against inflation. Many of them prefer to experience a low-risk investment with a reasonable return for various reasons such as lack of experience and familiarity with financial markets. In this article, we introduced low-risk investment methods with different returns. You can choose your suitable method based on your risk tolerance level and your expectation of capital return. In the meantime, don’t neglect to compare the investment yield with the inflation rate. If the return on investment is lower than the inflation rate, the value of your capital and purchasing power will decrease in the long run.