Whenever interest rates drop, people look out for investments with higher returns and low risks. But it is important to remember that all options that will offer higher returns will also involve relatively greater risk.
Take for example, reverse convertible notes or revertible notes, which are financial instruments with returns tied to a stock value. These instruments offer a higher rate of return, but if the stock value drops, you can suffer significant losses. In some cases, even the principal amount might not be recoverable. Yet another example is investing in a bond fund where you run the risk of losing your investment when the interest rates increase. The risk will increase with the term of the bond.
While investing, you should be careful about the kind of instrument as well as the investment firm you chose. You may come across advertisements of instruments that offer higher rate of returns than other similar instruments of other companies. However, these advertisements are many times misleading and you should enquire about all the terms and conditions before making an investment.
For instance, you can be offered some equity based product of companies that are just a year old or so, which means that you are essentially buying unsecured and extremely risky debt. It is a must to run background checks on every product’s composition before opting to invest in it. A number of companies do not reveal the degree of risk involved in an investment and fool gullible customers into making risky investments by attracting them with possibility of higher rates of return.
If you are seeking higher returns than the standard options like savings accounts, money funds, short term CDs and money market accounts, then keep in mind that the risk will increase with the likely magnitude of returns. It is therefore advisable to put some part of your investment in these standard instruments that will allow you instant access to money in case of an emergency. You can invest another part of your money in instruments that offer high rates of returns and involve high risks, but be careful not to get stuck with over rated or fraud investments.
Some part of your money should also be invested in instruments that offer average returns and involve average risks. Creating a diversified portfolio of this nature will give you the most optimal risk-return ratio and at the same time offer you a chance of earning big money through higher risk, but potentially higher return investments.