For beginners worried about losing money, starting to invest in the stock market can feel intimidating. Although equities have long-term growth potential, investors can find lower-risk opportunities through diversification.
But low risk doesn't necessarily mean risk-free. All investments in the market have some degree of risk. This depends on your financial objectives, investment time horizon, liquidity requirements, and risk tolerance.
1. Large-cap stocks
Large-cap stocks are mostly well-established companies with a high market capitalisation. They may be better able to withstand company-specific risks than smaller businesses because of their size and solid operations. They still are stocks, though, and can fall during market pullbacks. Investors must evaluate the financial performance, debt and business prospects before investing.
2. Broad-market index funds
Index funds invest in an index and give you exposure to several companies in one fund. This can decrease the firm-specific concentration risk relative to buying individual stocks. However, index funds still fall when the broader market declines.
3. Index ETFs
Another way to gain exposure to a basket of securities is through exchange-traded funds (ETFs). ETFs differ from mutual funds in that they trade on stock exchanges during regular market hours.
They offer investors a diversified structure, which can be beneficial for those looking to gain exposure to a wide range of the market. Beginners should always consider aspects like liquidity, costs, tracking differences, etc. before investing.
4. Dividend-paying stocks
Dividends are payments some mature companies make to shareholders from profits. Consider such businesses when investing for a mix of capital appreciation and dividend income. But dividends are not guaranteed, and a company may cut its dividend or stop paying dividends. Therefore, a company's dividend history should also be considered when assessing its financial performance and potential.
5. Hybrid mutual funds
Hybrid funds mix equity and debt. The allocation depends on the fund category. They offer diversification in one investment, but the level of risk varies by fund type. Investors should check the fund's objective and asset allocation before investing.
6. Debt mutual funds
Debt funds invest mainly in fixed-income securities and may offer less exposure to the fluctuations in the equity market. But they are not guaranteed return products. Returns may vary due to interest rate fluctuations and/or due to changes in the credit quality of underlying securities.
7. Liquid funds
Liquid funds invest in short-term debt and money-market instruments and are typically used to hold short-term surplus money. They might be an appropriate choice for investors who focus on liquidity and somewhat lower volatility. However, their returns depend on the market and are not guaranteed.
8. Arbitrage funds
Arbitrage funds aim to profit from price discrepancies in securities markets, cash, and derivatives. Their approach is not like traditional equity investments. They could be useful for investors seeking an option linked to the market but with a different risk-return ratio than normal equity funds. Not all returns are guaranteed, and investors should understand the strategy before investing.
9. Gold ETFs
Gold ETFs are an alternative for investors that allows them to benefit from gold prices without having to buy and store the metal. Gold can also provide diversification from stocks, as its price can move in the opposite direction.
But gold prices are volatile, and Gold ETFs can have tracking errors and costs. As such, they should be considered as just one part of a diversified portfolio, not a safe haven.
10. Government securities
Government securities are issued by the government and typically carry low credit risk in the domestic currency. Their market prices, however, may change in response to interest rate movements, especially for longer maturities. Investors should understand maturity risk and interest-rate risk before investing.
How should beginners choose?
There are no one-size-fits-all investments for beginners. Before selecting an option, consider your investment time frame, financial goal, liquidity needs, and loss tolerance. Short-term or emergency funds should ideally be kept separate from funds invested in the market long-term. Diversification can also help to minimise reliance on a single investment.
Conclusion
There are investment options that are relatively less risky and can help beginners start investing in the market in a more balanced way, but none of the options is completely risk-free. Knowing the risks, diversifying properly and investing based on your financial objectives can help develop a more disciplined investment strategy.
