Are you looking for the best low-risk investment options with decent returns? We overcome various challenges and hardships to earn our money, so it is only prudent that we choose safe investments with minimum risk.
There’s a wide range of investment options on the market today, and it can be quite confusing where to put your money, especially if you are a new investor. In this article, we explore some of the best low-risk investments available to you.
Best Low Risk Investments
High-Interest Savings Accounts
High-interest savings accounts provide an excellent opportunity to earn some interest on your cash with minimal risk.
With a high-interest savings account, you simply need to keep your funds on deposit, and you’ll receive interest on it. One good thing about this type of investment is that you’ll invest virtually nothing in terms of effort.
However, there are a few things to look out for when choosing a high-interest savings account. You want to work with a reputable bank with at least the following attributes:
- Excellent customer service
- Online account management
- Easy account access and deposits
- Competitive interest rates
Worthy Bonds may be the lowest risk investment that does not have insurance associated with it.
They work by allowing you to invest in loans to business that are secured by collateral (usually inventory). The collateral is valued at 125% of the amount of money loaned to the business.
So they can always sell of the collateral if someone defaults. Even better is that your money is completely liquid and you can invest with Worthy in only $10 increments.
Certificates of Deposit (CD)
A certificate of deposit (CD) is another loss-proof investment, provided you don’t withdraw the funds before the maturity day. With a CD, your bank offers to pay you a certain interest rate over a given term if you don’t withdraw your funds until the end of the term.
If you withdraw funds from a CD before the specified term end, you’ll typically lose a portion of the interest you have earned. With some banks, you may also lose your principal investment. Always read the bank’s regulations and check rates before opening a CD account.
If you are looking for an easy and cost-effective way to invest in real estate, real estate investment trusts (REITs) would be your ideal investment option. REITs are focused on investing in real estate assets, which may include:
- Mortgage-backed securities
- Mortgages on commercial and residential properties
- Apartment houses
- Commercial buildings
One of the best REIT opportunities is with Fundrise. You can invest in their starter portfolio of real estate investments for only $500. You can learn more about how they make it easy to invest in real estate in our Fundrise review.
Peer-to-peer lending is one of the best low-risk investments with high returns. It involves lending someone your cash in the hopes that they’ll pay you back later with some interest. There are many online peer-to-peer lending companies that you can utilize to invest in this manner.
These companies, such as LendingClub, provide the necessary infrastructure for setting up your investment. They provide you with the platform to evaluate borrowers and decide on the loans that you want to fund. You can also combine efforts with other investors for purposes of spreading the risk.
Dividend-paying stocks and exchange-traded funds (ETFs) are another tremendous low-risk investment.
However, choosing the right stocks to invest in can be a challenge. When it comes to this type of investment, it is advisable to put your money in a dividend mutual fund.
The best thing about dividend mutual funds is that the fund company focuses on stocks that pay high dividends. The company also handles every aspect of the investment for you.
There’s likewise the advantage of diversification, which ensures you don’t lose your entire investment if one or two stocks fail.
Money Market Funds
If you’re looking for an investment option that preserves your principal investment, money market funds would be your best bet. You won’t lose your principal investment with a money market fund. Money market funds aim at maintaining a net asset value (NAV) of $1 per share.
While the NAV can potentially drop below $1, it rarely does. This type of investment doesn’t pay a lot of interest, but you have peace of mind that market fluctuations won’t affect your principal investment.
U.S. Treasury Securities
The federal government offers a variety of investment options aimed at raising capital without raising taxes. Such investment options include:
- Treasury Bills
- Treasury Inflation-Protected Securities (TIPs)
- Treasury Notes
U.S. Treasury Securities are considered the best low-risk investment option.
They usually offer a higher yield compared to other investment options, such as money market funds and certificate of deposits (CDs). It is worth noting that you may not receive your principal should you sell a security before it matures.
Treasury Inflation-Protected Securities (TIPs) are a special kind of security. They are an investment bond designed to safeguard your investment from the detrimental effects of inflation. The federal government backs tips.
The investment pays a predetermined interest rate that is adjusted based on changes in the inflation rate. It is one of the most secure investment options. You have the assurance that no crisis or mishap will affect your principal investment.
Cash Value Life Insurance
When you invest in cash value insurance, not only will your beneficiaries receive a death benefit when you die but you also can accrue value with a portion of your insurance payments.
You can purchase cash value insurance in a variety of types, including universal life insurance and whole life insurance. The primary advantage of investing in cash value life insurance is that you are allowed to borrow money against the accrued value.
The money is also not subject to income tax. You can use this type of investment to pass some value onto your beneficiaries while saving them and yourself from paying income tax.
Corporate bonds are investment securities issued by companies in a bid to raise capital for various reasons such as to finance ongoing projects, mergers, acquisitions, or to expand the business.
The bonds are customarily rated as low, medium, or high quality. It is worth noting that there are two types of risk involved when it comes to investing in corporate bonds:
- Interest-rate risk – A bond’s market value can fluctuate with changes in interest rates
- Default risk – The company may renege on its promise to pay back your principal investment and the interest earned.
Fortunately, there are tricks to avoid these risks. To minimize interest-rate risk, consider investing in corporate bonds that mature in the next few years. Avoid longer-term bonds as they are more affected by interest rate fluctuations.
To minimize default risk, you should invest in high-quality bonds from reputable, large corporations. Alternatively, you can purchase funds that invest in such high-quality bonds.
One of the best things about corporate bonds is that bondholders are given a higher priority than stockholders. That means if a company you have invested in goes under, you will get your money back before any of the stockholders.
Mutual Funds (Managed Accounts)
Mutual funds are professionally managed portfolios of bonds and stocks. This type of investment has several advantages, including the following:
- An experienced professional manages your investment on a full-time basis.
- You get the opportunity to choose specific investment goals based on your needs, such as balanced growth, high growth, large growth, and emerging corporations.
- You can regularly invest small amounts of funds over long periods.
However, mutual funds are not without some shortcomings, which include:
- High sale commissions
- You have to pay management fees
- You have to pay securities commissions for the trade of securities in your portfolio
Nonetheless, the combination of diversification, professional management, and strict regulation make mutual funds one of the most-secure, low-risk investment options.
Municipal bonds are issued by governments to raise money at the state or local level.
They are one of the best local-risk investments as it is rare for municipalities to go bankrupt. Moreover, governments can increase taxes or issue new bonds to help offset the costs of the old bonds.
Another great thing about municipal bonds is that you normally won’t pay federal or state income tax on the interest earned.
Hence, the savings you make on tax and the reasonably high returns make municipal bonds deliver higher realized rates of return compared to investments that are subject to state and/or federal income taxes.
You can choose to purchase individual municipal bonds or purchase mutual funds or ETFs that invest in municipal bonds.
Online Checking Account
If you don’t like the idea of having to visit a physical checking account from time to time, you can opt for an online checking account.
It is advisable to choose an accredited financial institution that pays competitive interest rates on online checking accounts. Online checking accounts can be particularly beneficial if your local options are limited or offer lower returns.
Preferred stock is a type of stock that encompasses both an equity portion and a debt portion.
They are issued by companies and have a specified dividend rate that usually is about 2 percent higher than what treasuries and certificate of deposits pay. These types of stocks frequently trade within a few dollars of the price at which they were issued.
Preferred offerings typically pay monthly or quarterly. Additionally, their dividends can sometimes be eligible for capital gains treatment.
It’s also worth noting that preferred stocks have exceptionally low liquidity risk meaning you can sell your preferred stock without worrying about any penalties.
There are several types of preferred stock as outlined below:
- Cumulative preferred stock – With this type of stock, any dividends that the issuing company is unable to pay due to financial constraints are accumulated and will be paid when the company is finally able to meet its obligations.
- Participating preferred stock – With participating preferred stock, shareholders can receive more substantial dividends if the issuing company is making more profits.
- Convertible preferred stock – You can convert this type of stock to a specified number of shares of regular stock.
Preferred stocks are also generally rated by credit rating agencies. Their default risk is determined in the same way as that of bonds.
The higher the financial stability of the company issuing a preferred offering, the higher the rating it will receive. Lower-rated companies typically pay a higher dividend rate for their preferred stock in exchange for a higher risk of default.
One major benefit of investing in preferred stock is that in the event the company is liquated you’ll normally get your investment back before the common stakeholders.
Credit Card Rewards
Credit card rewards are another low-risk investment you can consider. Spending on credit cards sometimes comes with enticing rewards. Since using a credit card is almost inevitable, it’s only prudent that you capitalize on these rewards.
There are many ways you can benefit from using credit cards, including:
- Earning rewards
- Earning signup bonuses
- Earning cash back
If you choose a cash back credit card, for example, you will be rewarded for your spending with outright cash back. With some cards, you can receive up to 5 percent cash back.
If you use a card such as this on the stuff you need such as groceries and utility bills, you can end up earning a significant amount of money in the form of cash back rewards—so long as you pay off the debt during the grace period avoiding interest charges which may offset these earnings.
If you choose a reward card, you’ll normally receive points based on your spending. You can later redeem those points for cash, travel, gift cards, etc.
If you have any cash that you don’t plan to spend for a while, you can use it to make some extra cash in the form of a bank bonus.
These offers are not the same as a certificate of deposit and vary in detail but usually entail either depositing a certain amount into a new account or maintaining a certain balance for a set period.
In many cases, you can earn upwards of hundreds of dollars via these bonuses. It is essential to read and understand all the fine print before you sign up as different banks have different sets of conditions for bank bonus programs.
You want to understand any charges that you might incur and how you can get around them. One of the best things about this type of investment is that you won’t lose any of your deposit.
You also have the freedom to close your account at any time once you have earned your bonus as long as you fulfill all of the bank’s requirements. The downside is that, obviously, opening and closing bank accounts does require some busywork.
Final Thoughts on Low Risk Investing
You have a lot of options available to you when looking for low-risk investment.
From high-interest savings accounts to online checking accounts and bank bonuses, low-risk investments are designed to present you a safe haven in which to put your money in the hope of getting decent returns and being ready as you learn how to invest in higher risk, but more lucrative options.
Note that some of these investments aren’t totally risk-free, so you should do your own research and understand what you are getting into before putting your money in any investment option.