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Moderate Risk Investment in India

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Moderate Risk Investment Strategies in India
August 01, 2024

Table of Content

 

In India's dynamic financial landscape, striking a balance between maximising returns and minimising risk is a constant pursuit for investors. Moderate risk investments offer an attractive middle ground, catering to those who desire growth potential beyond low-risk options, but with a buffer against the volatility associated with high-risk ventures.

This approach allows you to harness the power of compound interest over time while safeguarding your principal investment to a reasonable degree. By exploring the diverse options available within the moderate-risk category, you can craft a personalised investment strategy that aligns with your financial goals and risk tolerance.

Understanding Medium Risk High Return Investments

Moderate risk investments, also known as medium-risk and return investments, occupy the sweet spot between low-risk and high-risk options. They provide the potential for significantly higher returns than fixed deposits or government bonds but with a greater degree of volatility compared to their low-risk counterparts. This volatility means the value of your investment can fluctuate in the short term, but historically, moderate-risk investments have offered the potential for substantial growth over the long term.

Examples of moderate-risk investments in India include certain types of mutual funds, real estate investment trusts (REITs), and select sectors of the stock market. Choosing the right moderate-risk investment requires careful consideration of your risk tolerance, investment goals, and time horizon.

The Appeal of Medium-Risk Investments

For Indian investors seeking to grow their wealth, moderate-risk investments offer a compelling balance. These instruments provide the potential for higher returns compared to low-risk options, like fixed deposits, while carrying lower risks than direct stock investing. This translates to the possibility of outpacing inflation and achieving long-term financial goals.

Moderate risk investments are ideal for individuals with a balanced risk tolerance who are comfortable with some price fluctuations in exchange for the chance of significant gains. This asset class caters to a wide range of investors, from those nearing retirement who seek to grow their nest egg to young professionals saving for future milestones. By incorporating moderate-risk investments into a diversified portfolio, Indian investors can leverage the potential for growth while mitigating risk.

Best Medium Risk Investments

Some of the best moderate risk investments are discussed below:

  • Balanced or Hybrid Mutual Funds:

For moderate risk-takers seeking a balance between growth and stability, balanced or hybrid mutual funds offer a compelling option. These funds strategically combine equity and debt investments, aiming to deliver capital appreciation alongside income generation.

The specific asset allocation between stocks and bonds varies depending on the fund's risk profile, allowing you to tailor your investment to your risk tolerance.

  • Life Insurance:

Life insurance can also be considered a moderate risk investment option, as it provides a guaranteed return in the form of a death benefit, while also offering the potential for cash value accumulation over time. Whole life insurance and universal life insurance policies, in particular, can provide a moderate level of risk, as they offer a guaranteed minimum return, but also offer the potential for higher returns based on the performance of the insurance company's investments.

Some benefits of life insurance as a moderate risk investment include guaranteed death benefit, potential for cash value accumulation, tax-deferred growth, flexibility in premium payments and death benefit and also an opportunity to invest in a variety of assets, such as stocks and bonds. Investors can also claim annual deductions up to Rs. 1.50 lacs under Section 80C on the amount of premium paid by them.

However, life insurance should not be considered solely as an investment, but also as a means of providing financial protection for loved ones in the event of death.

  • Equity-Linked Savings Scheme (ELSS):

ELSS mutual funds primarily invest in stocks, offering the potential for higher returns compared to fixed-income options. However, they come with inherent market volatility. The 3-year lock-in period encourages a long-term perspective, which can help mitigate risk and benefit from potential market growth.

ELSS also offers tax deductions under Section 80C of the Income Tax Act, making it an attractive option for investors seeking growth and tax benefits.

  • Monthly Income Plans (MIPs):

Monthly Income Plans (MIPs) offer a compelling option for investors seeking a balance of income generation and capital appreciation. MIPs are a type of mutual fund that primarily invests in debt instruments like corporate bonds and government securities, with a smaller allocation towards equities.

This strategic asset allocation aims to deliver regular dividend payouts, acting as a source of monthly income while also offering the potential for capital growth over the long term.

  • Real Estate Investment Trusts (REITs):

Real Estate Investment Trusts (REITs) offer an attractive option for those seeking stable returns with some growth potential. REITs pool investor capital to acquire and manage income-generating properties. Investors benefit from regular dividend payouts tied to rental income while also enjoying some appreciation potential through underlying property value increases.

REITs offer diversification away from traditional stocks and bonds and can provide a hedge against inflation. However, they are still subject to market fluctuations and property-specific risks.

  • Large Cap Mutual Funds:

Large-cap mutual funds invest in the stocks of India's biggest and most established companies. Large-cap funds offer a valuable balance. They provide the potential for steady growth alongside a relatively lower risk profile compared to small-cap or mid-cap funds. This stability makes them a compelling option for investors seeking moderate risk exposure within their portfolio.

  • Gold:

Gold has captivated investors for millennia. In India, it's particularly favoured for its cultural significance and stability. While gold prices can fluctuate, it's traditionally seen as a hedge against inflation and market downturns. Investors seeking moderate risk can consider physical gold or gold ETFs (Exchange Traded Funds) for portfolio diversification and long-term capital appreciation.

How to Approach Moderate Risk Investments?

For medium-risk investments, it's essential to have a carefully crafted investment plan. Below are some steps to help you navigate this process:

  • Assess Your Risk Tolerance: Understanding your risk appetite is paramount. Moderate risk options aim to balance growth with some volatility. Evaluate your comfort level with the asset’s market fluctuations to ensure your investment plan aligns with your risk tolerance.
  • Understand Your Financial Goals: Clarity on your financial aspirations is essential. Are you saving for a child's education, a dream retirement, or wealth creation? Aligning your medium-risk investments with your long-term goals ensures your portfolio works towards achieving your desired financial future.
  • Diversify Your Portfolio: To mitigate risk within your portfolio, spread your assets across various categories. This reduces dependence on any single security's performance. Consider a mix of stocks, bonds, and potentially real estate investment trusts (REITs) to create a well-rounded portfolio.
  • Consult a Financial Advisor: For personalised guidance on navigating moderate risk investments in India, consider consulting a registered financial advisor. Their expertise can help tailor an investment strategy aligned with your risk tolerance and financial goals.

4 Medium Risk Investment

Four additional moderate risk investment options are listed below for growth and capital preservation:

1. Corporate bonds

  • What are they?

Corporate bonds are debt instruments issued by corporations to raise capital. By purchasing a bond, you become a creditor to the company, lending them money. In return, they promise to pay you regular interest and return the principal amount upon maturity.

Corporate bonds offer a steady stream of income but generally carry more risk than government bonds, placing them squarely in the moderate risk investment category.

  • Current dividend yields:

The dividend yields of corporate bonds vary depending on the issuer’s credit rating and market conditions. Investors should conduct thorough research before investing to determine the prevailing yields. The corporate debt instruments typically yield an average of 8-10%, whereas government-held bonds usually yield about half of that.

  • What’s safe about them?

Corporate bonds offer a level of safety compared to stocks. When a company issues a bond, it's essentially borrowing money from you with the promise of repaying it with interest. However, unlike stocks, corporate bonds don't represent ownership in the company. Investment-grade corporate bonds are issued by financially stable companies, making them a relatively safe investment.

  • What’s the risk?

Corporate bonds, while offering potentially higher returns than government bonds, carry inherent risks. The issuing company's creditworthiness is a primary concern. If the company defaults, you could lose some or all of your principal investment. Moreover, bond prices fluctuate with interest rates. When interest rates rise, existing bond values may fall.

2. Preferred stocks

  • What are they?

Preferred stocks occupy a niche between common stocks and bonds. They offer a fixed dividend payout, prioritising shareholders over common stockholders in receiving dividends.

However, unlike bonds, preferred stocks don't mature and may not appreciate significantly in value. They provide a steady income stream but with limited growth potential, making them suitable for moderate-risk portfolios seeking some capital appreciation alongside regular income.

  • Current dividend yields:

Preferred stocks have varying dividend yields based on the issuing company and market conditions.

  • What’s safe about them?

Preferred stocks occupy a niche between stocks and bonds. They offer a fixed dividend payout to investors, prioritising these payments over common stock investors. Additionally, in the event of company liquidation, holders of preferred stock are paid before common stockholders.

While the returns are not guaranteed, these features provide a degree of stability compared to common stocks, making them a consideration within a moderate-risk portfolio.

  • What’s the risk?

Unlike bonds, preferred stock dividends are not guaranteed and can be suspended or reduced if the company faces financial difficulties. Additionally, the price of preferred stock can fluctuate based on interest rates. Rising interest rates can decrease their value.

3. Dividend-paying common stocks

  • What are they?

Dividend-paying common stocks are shares in companies that distribute a portion of their profits to shareholders periodically. These payouts can provide a steady stream of income alongside potential capital appreciation over time. However, dividend payments are not guaranteed and can fluctuate based on company performance.

For investors seeking a balance between income and growth, dividend-paying common stocks can be a suitable option within a moderate risk investment strategy.

  • Current dividend yields:

Dividend yields of common stocks vary widely across different companies and sectors. Researching individual stocks will provide insight into their current dividend yields.

  • What’s safe about them?

Dividend-paying common stocks offer a degree of stability within the moderate risk investment category. Companies with a history of consistent dividend payouts signal financial health and a commitment to sharing profits with shareholders.

These regular payouts provide a steady income stream, along with the potential for capital appreciation if the stock price rises. However, remember that stock prices can fluctuate, and dividends are not guaranteed.

  • What’s the risk?

The risk associated with dividend-paying common stocks includes market volatility, company-specific risks, and the potential for dividend reductions or suspensions. Moreover, the stock price itself can fluctuate, potentially leading to capital losses if you sell the stock at a lower price than you purchased it. Companies also do not have any obligation to pay you dividends.

4. Funds

  • What are they?

Mutual funds pool money from numerous investors and invest the money across various assets like stocks, bonds, or real estate. This diversification helps spread risk and offers a professionally managed approach. Several fund types cater to moderate risk profiles in India, offering a balance between growth potential and stability.

  • Current dividend yields:

The dividend yields of mutual funds depend on the specific assets held within the fund and can vary based on market conditions.

  • What’s safe about them?

Investing in mutual funds presents a valuable opportunity to access diversified portfolios, effectively minimising the risk involved in investing in single securities. These funds are expertly managed by professionals who are focused on producing returns while effectively mitigating risk levels.

  • What’s the risk?

The risk associated with mutual funds varies depending on the underlying assets and the investment strategy employed by the fund manager. Market fluctuations and the performance of the underlying assets can impact their returns.

Summary

Moderate risk investments provide an attractive balance between potential returns and risk exposure. By diversifying their portfolios and choosing suitable investment options, investors can navigate the market and achieve their financial goals. Whether investing in corporate bonds, preferred stocks, dividend-paying stocks, or mutual funds, it is essential to conduct thorough research, assess one's risk tolerance, and seek expert advice when needed.

FAQs on Moderate Risk Investment

1. What is a moderate risk investment?

A moderate risk investment refers to an investment option that offers a balance between the potential for higher returns and the associated risk. These investments typically fall between conservative options with lower returns and high-risk, high-reward assets.

2. Is moderate risk good?

Moderate risk can be suitable for investors seeking a reasonable balance between returns and risk. It allows individuals to grow their capital while minimising the potential for substantial losses.

3. What are examples of moderate risk taking?

Examples of moderate risk-taking include investing in balanced or hybrid mutual funds, equity-linked savings schemes, real estate investment trusts, dividend-paying common stocks, and moderate-risk bonds.

4. Are stocks moderate risk?

Stocks can fall into various risk categories. While some stocks may be considered high-risk, others, such as dividend-paying common stocks, can be categorised as more moderate risk investments.

5. What investment types are considered moderate?

Investment types considered moderate include balanced or hybrid mutual funds, equity-linked savings schemes, real estate investment trusts, dividend-paying common stocks, and moderate-risk bonds. These options offer a balance between potential returns and risk exposure.

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Francis Rodrigues Francis Rodrigues

Francis Rodrigues has a decade long experience in the insurance sector, and as SVP, E-Commerce and Digital Marketing, HDFC Life, manages the online sales channel, as well as digital and performance marketing. He has had hands-on experience in setting up sales channels and functional teams from scratch over a career spanning 2 decades.

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Vishal Subharwal Vishal Subharwal

Vishal Subharwal heads the Strategy, Marketing, E-Commerce, Digital Business & Sustainability initiatives at HDFC Life. He is responsible for crafting and ensuring successful implementation of the overall organisation strategy.

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