No Risk or Low risk investment options work on the idea that over the next few years, investments in most of the products that have historically given predictable returns will not deviate majorly from such a track record. For example, if one invested in a bank fixed deposit with a yearly return of 10%, then the investor will get the same amount at the end of the month. Here the risk lies in the bank collapsing and the investor not getting the interest and the full principal back. But for all practical purposes, such bank collapses are very rare in India. There is no chance of the investor getting a return higher than the bank rate agreed between the bank and the investor at the start of the fixed deposit.
On the other hand, equities are riskier investments. While blue chip companies are having less risk than smaller companies. There is no guarantee of any return and there is a very high risk of losing money. On the other hand, in case there is some positive development in the company whose stock is trading below Re. 1 the stock could double in no time.
High risk investments have higher returns, and thus lower stability in return. Investments that carry lower risk the returns would also not be high.
Bank FDs which carry lower risks but lower fixed returns. The other options are small savings schemes like National Savings Certificate, post office monthly income schemes, public provident funds etc. Bonds and nonconvertible debentures (NCDs) of government run companies and blue chip companies are also relatively safer investments. Some companies are paying a higher rate of return on FDs floated by them than other companies. Here the more a company pays in their FDs, higher the risk the investor has. One way to find out which company has a lower risk than the other is to look at the ratings assigned to the company by rating agencies like Crisil, ICRA, CARE etc. Better the ratings (AAA is the highest, D is the lowest), of a company, lower would be the risks in its FDs, but at the same time lower would be the interest on such FDs.
Among the low risk investment options that investors can consider are the mutual funds schemes, especially the ones that have higher exposure to bonds, money market instrument etc. and lower exposure to stocks. Among the several advantages of investing in mutual funds is that investors get professional fund management expertise but at a much lower cost than if they invest directly.
Among the lower risk fund options are fixed maturity plans, popularly known as FMPs. Compared to FDs, in which investors know how much they will earn at the end of the term, FMPs indicate a return that you can earn at the end of the plan, but do not assure it. So the actual return could deviate from the indicative return, but mostly such differences are minimal. However, in FMPs, the post-tax return is usually higher than FDs of comparable maturity. This is because tax treatments are favourable to FMPs over FDs. So while FDs are suitable for those who are satisfied with assured returns, if you are willing to take a slightly higher risk, you can consider FMPs for a slightly higher return.
There are some types of mutual fund schemes available in the market, which offer even lower risks than FMPs. These are liquid funds, ultra short term debt funds, capital protection oriented funds and short term income funds.
There is another category of funds called Gilt funds, which invest mainly in government securities. Since these are securities backed by government guarantees a few years ago investors were of the idea that there were no risks in these funds. This is not true. While the principal and interest in these securities are fully guaranteed by the government you should remember that the market price of these securities vary and so the NAVs, and hence the returns, on these schemes can also vary. So, these funds are not risk free investment products.
Monthly income plans (MIPs) are also considered low risk options, but before you invest in these schemes remember to check how much equity exposure the fund can take. Here again, the thumb rule is higher the equity exposure, higher the risks associated with these funds. The same rule applies to balanced funds.