Making investment is a difficult decision-making process that can significantly impact your financial future. The choice between risk-free and risky investments is one that demands careful consideration. Some people feel that they need to only get into safe investment options while others feel they would only invest in high-risk funds.

Whether you can take the risk or only invest in safe products entirely depends on your ability to handle it financially and what are your goals. You can diversify your investment depending on your risk appetite, goals and income.

Your investment choices should be tailored to your financial objectives. Short-term goals, such as creating an emergency fund, are best served by risk-free investments. Long-term goals, such as retirement planning or wealth accumulation, may benefit from a combination of both risk-free and risky assets.

It’s important to understand the fundamental differences between these two investment options to achieve your financial goals.

Also Read: Credit score based home loans at below 9% – Check latest rates

Risk-Free Investments

* Safety

Risk-free investments are often synonymous with safety. These options are characterised by minimal to no risk of losing your principal amount. The most common risk-free investment is a bank fixed deposit or government schemes offering fixed returns. When you deposit money in a bank fixed deposit, your investment is protected by the Deposit Insurance and Credit Guarantee Corporation (DICGC), up to a limit of Rs 5 lakh per account. This makes it an ideal choice for conservative investors who prioritize the security of their funds.

* Low Returns

While risk-free investments offer safety, they typically provide lower returns compared to riskier options. In India, bank fixed deposits usually offer interest rates lower than the inflation rate, which means that your purchasing power may erode over time. However, for individuals who cannot afford to take on significant risks, these investments provide a safe harbor.

* Lack of Liquidity

Risk-free investments often come with a lock-in period or withdrawal restrictions, making them less liquid than riskier assets. This can be a disadvantage if you need quick access to your funds. Bank fixed deposits, for instance, may impose penalties for premature withdrawals.

Risky Investments

* Potential for High Returns

Unlike risk-free investments, risky investments have the potential to deliver substantial returns. In India, various options fall under the category of risky investments, including stocks, mutual funds, real estate, and more. While they carry higher risks, they also offer the possibility of significant gains, making them appealing to investors with a higher risk tolerance.

* Market Volatility

One of the defining characteristics of risky investments is their susceptibility to market fluctuations. Stocks, for example, can experience substantial price swings in a short period. Understanding market dynamics and having a well-thought-out investment strategy is crucial for mitigating risk and maximizing returns.

Balancing Investments

A well-diversified portfolio can help balance risk and return. Combining risk-free investments like fixed deposits with riskier assets like mutual funds can provide a reasonable compromise between safety and growth. Investing in risky assets allows you to diversify your portfolio.

Adhil Shetty, CEO, Bankbazaar.com, says, “Diversification is a strategy that involves spreading your investments across different asset classes to reduce risk. Mutual funds offer a convenient way to diversify your portfolio by investing in a mix of stocks, bonds, and other assets.”

Assess your risk tolerance honestly. If you have a low tolerance for risk and cannot afford to lose your investment, prioritise risk-free assets. On the other hand, if you have a higher risk tolerance and can withstand market volatility, you may consider incorporating risky assets into your portfolio.