11 Best Low-Risk Investments in January 2023

Low risk investments are assets that provide a conservative rate of return on initial investment. Some examples of low-risk investments in Nigeria include government bonds, series savings bonds, high-yield savings accounts, and money market funds. It's important to carefully evaluate the risks and potential returns of any investment before deciding whether it is suitable for your investment goals. Read this article to learn more about low-risk investments

Introduction

When investing, two fundamental factors must always be assessed; risk and reward. Risk and reward are usually directly proportional to each other. To a new investor, this might seem like a confusing turf as risks may not be spotted immediately. Rather, even the differentiation of low risk and high risk might take a person some time to learn. 

Building your portfolio involves investing in a series of assets across risk horizons. In 2023, ensure you build a portfolio with some low risk investments that provide high returns. This can help you create protection from prevailing volatility in the market. The trade off of investing in low-risk investments is that the rate of return may be slightly lower over the long run as there is reduced risk exposure. This is a stable source and good-to-have investments provided you want to preserve your capital and build a flow of interest from your investments for a specific goal. 

For long-term goals, you can increase your risk horizon. Consider exploring strategies that involve dividend stocks where risk is reduced, passive income is cashed in and there are sustained returns over a period of time. Yield savings accounts and bonds may not be your best bet in this situation. 

What are Low-Risk Investments?

Low-risk investments are those investments that yield lower rates of returns as per their asset class. Low-risk investments are safer ways to diversify your portfolio and achieve certain short-term financial goals in a stable manner. For long-term goals, you can increase your risk horizon based on the time period you want to save for. 

Read to learn more about the types of low-risk investments available in the market along with the best options suitable for you!

What to consider when assessing low-risk investment options? 

Based on the risk you are willing to bear, there are specific scenarios that could pan out. Here are a few examples: 

1. No risk: You never lose any amount of your principal investment.
2. Some risk: You will either break even or possibly incur a small loss over time.

Some low-risk investments can bring you lower returns but not at the cost of effectively hedging for inflation. The effective purchasing power of money can be reduced. 

If you look at only low-risk investments, you’re bound to lose purchasing power over time. Low-risk plays are better options if you have a short-term goal you are trying to fulfil or for your emergency fund. You may not outperform the market but these strategies can help you achieve goals where growth isn’t the only assurance. Investments with higher risks are better for the long-term. 

The 11 best low-risk investments in December 2022

1. High-yield savings accounts

High-yield savings accounts in Nigeria are a type of savings account that offer higher interest rates than traditional savings accounts. These accounts can be a good option for individuals looking to grow their savings and earn more money on their deposited funds. To open a high-yield savings account in Nigeria, individuals will typically need to meet certain requirements, such as maintaining a minimum balance and making a certain number of transactions per month. It's important to compare the interest rates and fees of different high-yield savings accounts before deciding which one is right for you. It's also a good idea to consider the financial stability of the bank or financial institution offering the account, as you want to make sure your money is safe.

2. TIPS (Treasury Inflation-Protected Securities)

TIPS are a type of Government bond. These bonds are designed to help individuals save money and earn a return on their investment over time, while also protecting their purchasing power against inflation. They offer a fixed rate of interest, as well as an inflation-adjusted rate that is determined by the Consumer Price Index (CPI). This means that the value of the bond increases over time to keep up with inflation. TIPS can be purchased in denominations of $100 or more, and they can be held for up to 30 years. They can be redeemed at any time, but if they are redeemed before they reach maturity, there may be a penalty for cashing out. TIPS are a good option for individuals looking for a long-term investment that is safe and offers a return that is tied to the rate of inflation.

3. Short-term certificates of deposit or CDs

‍CDs are time deposits offered by banks and credit unions that typically offer a higher interest rate than savings accounts. The trade-off is that you must leave the money in the CD for a set period of time, usually several months to a few years.

4. Money market funds

‍Money market accounts are similar to savings accounts, but they often offer a higher interest rate. They may also have higher minimum balance requirements and may be limited to a certain number of withdrawals per month.

5. Treasury bills and notes

Treasury bills and notes are debt securities issued by the Central Bank of Nigeria (CBN) to finance the government's spending. They are considered to be low-risk investments because they are backed by the full faith and credit of the government. Treasury bills are short-term securities that mature in one year or less, while Treasury notes are longer-term securities that mature in more than one year but less than 10 years.

Both Treasury bills and notes can be purchased in denominations of NGN10,000 or more. They can be purchased directly from the CBN or through primary dealers, who are banks and other financial institutions that are authorized to buy and sell the securities. Treasury bills and notes can also be purchased through brokers or through the secondary market, where they are traded by investors.

The interest rate on Treasury bills and notes is determined through auctions, which are held regularly by the CBN. The interest rate is typically fixed, but it can vary depending on market conditions and the level of demand for the securities. Treasury bills and notes can be a good investment option for individuals looking for a low-risk way to save money and earn a return on their investment.

6. Corporate bonds

Corporate bonds are debt securities issued by companies in Nigeria to raise capital for various purposes, such as expansion, funding new projects, or refinancing existing debt. They are a low-risk investment option. 

To invest in corporate bonds in Nigeria, individuals can purchase the bonds directly from the issuing company or through brokers or financial institutions. The bonds can also be traded on the Nigerian Stock Exchange (NSE), which is the primary market for corporate bonds in the country.

The interest rate on corporate bonds is typically fixed, but it can vary depending on the creditworthiness of the issuer and the perceived risk of the bond. Investors in corporate bonds typically receive periodic interest payments, known as coupons, until the bond matures and the principal is repaid. Corporate bonds can be a good investment option for individuals who are willing to take on more risk in exchange for the potential for higher returns. It's important to carefully evaluate the financial stability and creditworthiness of the issuing company before investing in corporate bonds.

7. REITs

REITs, or real estate investment trusts, are companies that own and operate income-generating real estate properties. They are required to distribute at least 90% of their taxable income to shareholders in the form of dividends.

8. Preferred stocks

Preferred stocks are a type of equity investment that gives shareholders a claim on a company's assets and profits, similar to common stocks. However, unlike common stocks, preferred stocks typically do not have voting rights and their dividends are fixed. Preferred stocks are considered to be a hybrid between stocks and bonds, as they have some characteristics of both.

In Nigeria, preferred stocks can be purchased on the Nigerian Stock Exchange (NSE) or through brokers or financial institutions. The price of preferred stocks can fluctuate based on market conditions and the performance of the issuing company.

Preferred stocks are a good investment option for individuals looking for a higher level of income and stability than common stocks, but with more potential for capital appreciation than bonds. It's important to carefully evaluate the financial stability and prospects of the issuing company before investing in preferred stocks.

9. Peer-to-peer lending

Peer-to-peer lending platforms allow individuals to lend money to other individuals or small businesses in exchange for interest. These loans are typically unsecured, which means that they are not backed by collateral. While the potential returns may be higher than other low risk options, there is a risk of default.

10. Fixed annuities

Annuities are financial products that offer a guaranteed stream of income in exchange for a lump sum payment. There are several types of annuities, including fixed, variable, and indexed, each with its own set of features and risks.

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11. Common Stocks that Pay Dividends

Dividend-paying stocks are stocks that pay a portion of their profits to shareholders in the form of dividends. These stocks may offer a lower return than growth stocks, but the dividends can provide a steady stream of income and may help to mitigate the overall volatility of the stock market.

Conclusion

Low-risk investments can be good to achieve your short-term goals and expand your portfolio. It is important to note that all investments carry some level of risk, and it's important to carefully consider your financial goals and risk tolerance before making any investment decisions. It is a good idea to diversify your investment portfolio to spread risk and potentially improve your overall return

FAQs

1. Why own low-risk investments?

A few reasons to own low-risk investments has to do with capital preservation, consistent returns and portfolio diversification.

2. When should you buy low-risk investments?

Low-risk investments can be a good option for individuals at any stage of their investment journey. They may be particularly suitable for individuals who are risk-averse, have a short-term investment horizon, or are approaching retirement.

3. Are there high-yield, low-risk investments?

It is generally considered that higher yields come with higher risk. However, there are some low-risk investments that offer higher yields than others. For example, some types of government bonds or high-yield savings accounts may offer higher yields than traditional savings accounts or money market funds. It's important to carefully evaluate the risks and potential returns of any investment before deciding whether it is suitable for your investment goals.