Low risk investments brings to mind the story of the rabbit and the hare. Slow and steady wins the race – as the saying goes. When it comes to investments, a low risk investment is the embodiment of slow and steady. If you want a place to park your money and earn a steady (albeit) low return with very little chance of losing it – low risk investments are the way to go.
Here are some low risk investments that you can park your money in:
Low risk investment #1: The Savings Account
Ah, the good old savings account. Everyone can and should open a savings account. They’re handy things to have. You can open a savings account right now with your favorite bank. These days, you can even do it online. Savings accounts will give you phenomenally low interest rates on your investments. This is because you often require very little (and sometimes nothing) investment to open one and you can withdraw your money at any time.
How does this low risk investment work?
Savings accounts are different from your regular checking accounts because they have higher interest rates. Comparatively anyway. Generally, you can expect to make a return of 1% to 2% on your investments in savings accounts. This means that if you were to invest $1,000 today, you’d have about $1,020 in one year. It’s not much, but it’s something. Banks often encourage investors to not take money out of their savings account by penalising the investor with a lower return on months where they withdraw money out of the account. When you invest in a savings account, you’re helping the bank make money. So when you take that money away, they give you less return. Check your bank’s website if you want to open a savings account.
What do you use it for?
If you run a business, savings accounts are great for budgeting and money management purposes, as discussed in this article. Savings accounts are also great for putting money away for short to medium term goals – like a vacation, a new car or a wedding. Savings accounts aren’t great for retirement planning though, for that you will want to look at investments such as:
Low risk investment #2: Term Deposits
Term deposits are also known as ‘Certificate of Deposits’ and ‘Cash Investments’ depending on which part of the world you are from. Term deposits are like savings accounts on steroids. You invest your in a term deposit, and then you get it back with interest after a certain amount of time.
How does this low risk investment work?
Term deposits often come in different terms (hence the name) which dictate how long you have to invest the money for. The longer the term, the higher the return you can get. For example:
Gimme Money Bank has three term deposits available for their investors: The first one provides a return of 2.5% over a term of one year. The second one provides a return of 3.5% over a term of two years. The third one provides a return of 5% over a term of four years.
When you invest in a term deposit, that money is locked away for the set term. You can’t touch that money until the end of the term. This is the price you pay for the (slightly) higher return you make on term deposits as opposed to savings accounts. It gives the banks security over your invested funds to make more money over a certain period of time (which is where your return comes from, btw).
What do you use it for?
Term deposits are popular with retirees because it gives them a safe location to stash their savings. If you are saving up for a first home deposit (which can take between two to three years, depending on your income), term deposits are a safe place to chuck your saved up money while you continue saving up for that goal. Check your bank’s website if you want to open a term deposit. Be sure to select a term that aligns with your financial goals.
If you are looking for slightly higher returns over a similar period of time, I can recommend:
Low risk investment #3: Crowd Lending
Crowd lending (also known as Peer to Peer Lending) is a relatively new innovation in personal finance. Crowd lending is much like crowd funding, except without all the bells and whistles. Unlike crowd funding, you are not pre-purchasing exclusive products, rather you are lending your money to a pool which the borrower can borrow from.
How does this low risk investment work?
For example:
You invest your money with a crowd lending provider, CrowdLend. They build up a pool of investment from other investors. Then they lend your (and other investors’) money to borrowers which pay them a fixed interest rate. At the end, CrowdLend takes a portion of the profits and pays you a fixed return on your investment.
Crowd Lending are very much like Term Deposits. Except that they give higher returns over a shorter period of time. As discussed before, a higher return often means higher risk. Crowd Lending funds are higher in risk because they loan to retail investors for things like personal loans, house renovations and business loans. There is always the risk the borrower will default and not pay back the money.
To manage this risk, some providers like Squirrel Money have a reserve fund setup to compensate the investor should the borrower default. That being said, if all of their borrowers default, there won’t be enough money in the reserve fund to compensate all investors. Of course the likelihood of that happening is low, but it’s good to be aware of this.
Crowd lending is still a low risk investment though – you can get returns between %4.5 to %7 depending on how long you invest for. You can invest in different types of loans which will give you different returns based on how risky they are. Unlike term deposits, there is also the option to get out early by selling your investment to another investor on the secondary market.
What do you use it for?
Anything you would use a term deposit for, in my opinion. I would rather put my money in Crowd Lending rather than term deposits to save up for my first home deposit. But just because it’s right for me, doesn’t mean it’s right for you. To see if crowd lending suits YOUR financial goals, check out Squirrel Money.
Click here to read our article on high risk investments next!
santander yardley
Sam H