Which Investment Type Typically Carries the Least Risk

Well, there are numerous investment that you can choose but some have lower risk than others. So, here are six investment type that typically carries the least risk;

• Bank Fixed Deposit

• Fixed annuities

• Treasury bills and bonds

• Money market mutual funds

• High yield savings account

• Certificates of Deposit, CDs

1. Bank Fixed Deposit

Bank fixed deposit is also among the best low risk investments that most households consider. You need a bank account to start investing for a fixed period. The primary reason for investing in Fixed deposits is guaranteed higher returns than saving accounts offer.

The interest rate used by financial institutions relies on factors such as residential status, amount, investment terms, and more. Senior citizens benefit more from bank fixed deposits from higher return percentages.

Another thing is FDs have a fixed period or lock-in period. This has brought discipline to investors as you can only withdraw your money once the fixed time collapses.

Pros of Bank Fixed Deposit

• Assured returns after fixed time collapse

• Less risk involved

• Guaranteed decent returns more than saving accounts

2. Fixed Annuities

A fixed annuity could be your solution if you are looking for a good retirement investment. Fixed annuity is a popular form of annuity contract used for retirement planning and can also work for medium term financial goals.

You can get it from a financial institution or an insurance company. Fixed annuities guarantee returns at a fixed rate over a fixed period, no matter the market conditions.

So this is how annuities work. It has two phases: accumulation and payout. In the accumulation phase, you make down payments to your fixed annuities and earn interest which increases the value of the account tax deferred. Now, the payout phase can be a single, lump sum, or regular payments over time.

But, even if fixed annuities can easily erode because of inflation, companies offer cost-of-living adjustments(COLA) riders to boost the value of annuities to keep up with increasing prices.

Pros of fixed annuities

• Guaranteed returns at fixed rates

• Good retirement investment

• The market condition doesn’t affect returns

3. Treasury bills and bonds

Treasury bills and bonds are the lowest-risk investment you can opt for as governments always try to ensure debts are settled to make the bills and bonds low risk. The difference comes in their maturities.

Treasury bills have maturities of 4,8,13,26, and 52 weeks and are discounted to their face value when selling. So, your profit is what you get between the purchase price and par value. Treasury bonds are a little different as they come with a fixed rate and maturity rate of 10 to 30 years.

Bonds are debt securities issued by governments or private companies. They are bought and sold on secondary markets but remain on hold until maturity. The interest rate payments are made every six months.

There is also a type of bond called Treasury Inflation Protected Securities (TIPS). It offers protection against inflation. TIPS’s principal value is based on the consumer price index, so it will increase with inflation and decrease with deflation.

Another thing is government bonds have less risk as compared to corporate bonds. But you’ll also receive lower returns from them. Conversely, corporate bonds are considered high risk as they offer higher returns.

Pros of Treasury bills and bonds

• Longer maturity date

• Treasury bills are best for lower risk investments

• Bonds increase with inflation

• Treasury bills are very liquid

4. Money Market Mutual Funds

If you’re uncomfortable with risking your money in the stock market, mutual funds work best for you. We’ve listed it among the best low risk investments as it diversifies your payment. This means you’ll get a risk-free investment.

Mutual funds invest in fixed income securities with very low risk and short maturities. However, money market funds defer from other mutual fund types (index, stable value, short term bond funds) because of their modest interest rate.

This type of low risk investment provides plenty of liquidity considering the type of investments it makes. The risk of losing money with this form of investing in mutual fund companies is minimal.

This is a great choice if you plan on making a big purchase or investing in something huge in the coming years, such as a down payment on a house.

Pros of investing in money market mutual funds

• A modest rate of interest

• More secure, unlike stocks

• You can invest as low as USD 6

5. High yield savings accounts

Savings accounts have a bad history of low interest rates, but they are known to have high liquidity risks. You have access to your money anytime you need it.

Though savings accounts are not the best investment option, even with their good returns, this is the best option for emergency funds. That’s because your saving will increase or remain constant, but it will never decrease.

The interest rate of high yield savings account vary, but this entirely depends on the market conditions. Besides, saving accounts are backed by FDIC, so the risk of losing money is very low.

Pros of high yield savings account

• Suitable for an emergency fund

• Cash is available when needed

• Good returns rate

• Good returns if remained untouched

6. Certificates of Deposits (CDs)

With certificates of deposit accounts, you invest your funds at a specific rate for a fixed period. Well, you cannot withdraw the funds before the maturity date. An early withdrawal request from CD accounts triggers a penalty fee.

CD types include bump-up, high-yield, step-up, jumbo, regular, IRA, and no-penalty CDs. Financial institutions have different fees and rules set for CDs. And the fact that FDIC insures CDs up to the statutory limits, it’s a good low risk investment option.

Pros of CDs

• Insured by FDIC

• The specific set return rate

• Good returns after the fixed period

• Builds financial discipline because of penalty fee