Moderate Risk Investments: How Much Can You Expect?

Moderate-risk investments are a great way to add a touch of spice to your portfolio. They are any assets or financial services with a track record of reliable gains but a moderate risk profile. These investments allow investors to add volatility to their portfolios without going overboard with high-risk plays like penny stocks or speculative cryptocurrencies. While they don't offer the security of low or no-volatility options, they provide a higher reward potential. Moderate-risk investments typically have at least 40-60% of their portfolio invested in moderately volatile assets. Examples include real estate, fine art, and private equity in a profitable company.

Corporate bonds

The current returns on corporate bonds vary, with the Moody's Seasoned Aaa Corporate Bond Yield at 4.95%.

When investing in corporate bonds, it is important to assess the credit rating allocation and the duration profile of the bonds. Additionally, consider the fund's potential risk class and risk-o-meter, which indicate its potential and current risk.

According to the Securities and Exchange Board of India (Sebi), corporate bond funds must allocate at least 80% to corporate bonds rated AA-plus or higher. These funds offer high credit quality and moderate duration risk, providing an attractive option for investors seeking moderate-risk investments.

Preferred stock

However, it is important to note that paying dividends is at the discretion of each company, and they can forgo payments in times of severe austerity. If the company goes bankrupt, bondholders are paid before preferred stockholders. The market value of preferred stocks also tends to appreciate more slowly than common stocks from the same company. As with bonds, it’s often fluctuating interest rates, not company performance, that most heavily influences the value of preferred stock.

Dividend-paying stock

When considering dividend-paying stocks, it is important to evaluate the dividend yield, payout ratio, and dividend coverage ratio. The dividend yield is the amount paid out per share divided by the price per share. A high dividend yield, however, may not always be sustainable, and it is important to scrutinize such yields carefully. The payout ratio indicates how much of the company's profit is being distributed as dividends, with a higher payout ratio suggesting a riskier investment. The dividend coverage ratio, calculated by dividing a company's annual earnings per share by its annual dividend per share, provides insight into the company's ability to sustain dividend payments.

It is also worth noting that companies with a consistent track record of increasing their dividends tend to be more stable and are more likely to weather downturns. Additionally, dividend-paying stocks can be purchased individually or through dividend funds, which offer instant diversification and lower fees.

In summary, dividend-paying stocks can be a good option for investors seeking regular income and moderate risk. However, it is important to carefully evaluate the financials of the company and consider the overall investment portfolio to ensure a balanced approach.

Funds

• Mutual Funds: These funds pool money from multiple investors and invest in a diversified portfolio of assets. Mutual funds are actively managed by professionals, who aim to generate returns while effectively managing risk. The risk associated with mutual funds depends on the underlying assets and the investment strategy employed by the fund manager. It's important to consider the fees associated with actively managed funds, as they can eat into your returns over time.
• Index Funds: Index funds are a type of mutual fund that passively tracks a specific stock market index, such as the S&P 500. They aim to mirror the performance of the index, providing broad market exposure at a lower cost than actively managed funds. Index funds are suitable for long-term investors who want to track the performance of a particular market or sector.
• Exchange-Traded Funds (ETFs): ETFs are similar to index funds in that they track a specific index or sector. However, they can be traded on stock exchanges like individual stocks, offering more flexibility and liquidity. ETFs typically have lower fees than mutual funds, making them a cost-effective way to gain exposure to a diverse range of investments.
• Balanced or Hybrid Mutual Funds: These funds offer a balance between growth and stability by strategically combining equity and debt investments. The specific mix of stocks and bonds varies depending on the fund's risk profile, allowing investors to tailor their investment to their risk tolerance.
• Equity-Linked Savings Schemes (ELSS): ELSS mutual funds primarily invest in stocks, offering the potential for higher returns. However, they come with market volatility and usually have a lock-in period of 3 years, encouraging a long-term investment perspective. ELSS funds may also offer tax benefits, making them attractive for investors seeking both growth and tax advantages.
• Monthly Income Plans (MIPs): MIPs are a type of mutual fund that focuses on income generation and capital appreciation. They invest primarily in debt instruments like corporate bonds and government securities, with a smaller allocation to equities. MIPs aim to provide regular dividend payouts as a source of monthly income, along with potential capital growth over the long term.

When investing in funds, it's important to consider your investment goals, risk tolerance, and time horizon. Conduct thorough research, assess the fees and expenses associated with the fund, and seek expert advice if needed to make informed investment decisions.

Fine art

When considering investing, it's important to understand your risk tolerance and financial goals. Medium-risk investments balance potentially high returns with stability. They are a great way to grow your personal wealth and can be a good option if you are looking for long-term growth, regular income, or a combination of both.

Art investment is an alternative form of investment that can be very rewarding but also carries a certain level of risk. Art is a tangible investment that you can enjoy without worrying about impacting its return on investment. Historically, fine art has shown potential for appreciation over time and has stood tall against economic uncertainty, making it a great hedge against inflation.

However, it's important to note that not all pieces of art will increase in value. For example, investing in up-and-coming artists can be rewarding, but it is also risky. If you are looking for a safer, low-risk option, consider blue-chip art, which is created by artists with a history of maintaining or increasing the value of their work over time, such as Banksy, Warhol, and Picasso.

Art can be a risky investment for several reasons. Firstly, like fashion, artists and their work go in and out of style, affecting the resale value and return on investment. Secondly, art acquisition comes with extra costs such as commissions and insurance. Lastly, there is always a chance of forgery, theft, or damage.

To invest in art, it is recommended to abandon your personal preferences and instead focus on research. Just 1% of all artists generate more than half of all artwork sold globally, so it is challenging to predict emerging trends, especially for those new to the art market.

If you are unsure where to begin, consider investing in art through a gallery or liaising with an art advisor to make an informed choice.

Frequently asked questions