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Are you ready to take higher risk to get better return?

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high risk high return

Who doesn’t want higher return? Recently, one of my dear friends wanted me to advise him on financial products to invest for his goals. He wanted a precise answer. Before I advised him, I asked him the following basic questions –

1)      What are your expectations on returns?

2)      What is the time frame of your goals?

3)      What’s your risk appetite

Here are the answers I got:

1)      12-14% p.a

2)      1-2 years

3)      Guaranteed or Low risk

Now, when I got these answers, I immediately realized that there is a mismatch. First of all, 12-14% p.a returns cannot be achieved with low risk financial instruments. It’s even more difficult to achieve this kind of returns with the time frame he provided. So, I told him that though there are high return investment ideas, it cannot be done with a conservative risk appetite and such a short span of time.

(Also see: Different sources of risk)

After this, I looked upon few financial products for those of you seeking higher return and willing to take higher risk. Let’s look at some high risk investment plans now:

1) Company Fixed Deposits

If you are ready to take slightly higher risk, you can look to invest in company fixed deposits to get a higher return. Company or Corporate fixed deposits are similar to fixed deposits of banks with the only difference that deposits are accepted by corporate houses. Since risk is higher, return given is also higher on this investment.

Investment needed – Rs. 10,000 – Rs. 20,000

Tenure – 1, 2, 3 and 5 years

Expected return – 11-13% p.a

Taxability – Interest income added to total income and taxed accordingly.

Type of Risk – Default risk

2) Mutual Funds

Investing in mutual funds is similar to buying mangoes. Like mangoes, they come in different varieties and costs. There are low risk mutual funds such as large cap and index funds whereas high risk funds such as sector, contra and thematic funds. Sector funds invest in a particular sector, contra funds take a contrarian view on the markets and thematic funds invest based on a theme.

Investment needed – SIPs starting from Rs.1000

Tenure – 5+ years

Expected return – 13-15% p.a

Taxability – Nil if held for more than 1 year and 15% if held for less than 1 year.

Type of Risk – Capital risk

(Also see: How to pick mutual funds?)

Use our Mutual fund calculator to calculate maturity value of SIPs made.

3) Stocks and Derivatives

Trading in stock market can be done in different ways. Two of these ways are buying stocks and investing in derivates such as F&O. Risk is higher in Futures compared to options where loss is limited to margin amount paid up front.

Investment needed – Rs. 5000 or more

Tenure – 5+ years for stocks, 2-3 months for F&O

Expected return – 15-20% p.a

Taxability – Nil if held for more than 1 year and 15% if held for less than 1 year in case of stocks, derivatives as business income.

Type of Risk – Capital risk

4) Portfolio Management Services

This is a new age investment product which suits aggressive investors who believe in ‘do or die’ philosophy. Like in mutual funds, a portfolio manager is allotted to you to trade on your behalf. The PMS gets its commission whenever they buy and sell for you. They follow an active investment strategy. As the number of trades increase, your costs will also increase.

Investment needed – Rs. 25 lakh

Tenure – 2-3 years

Expected return – 15-20% p.a

Taxability – Short term or Long term capital gains tax

Type of Risk – Capital risk

5) Real estate

Real estate has been the king of investments in the past decade or two. It has made people millionaires and billionaires. It is even more attractive due to the emotional attachment of owning a home in India. That doesn’t mean it is risk free. It is a high risk investment, especially because real estate does not have a regulatory authority in place, yet. There are issues such as road widening, land acquisition, land grabbing and so on which does not make it a safe place to invest. Also, there is no guarantee that real estate can produce the same kind of returns in the next decade as it has managed to do till now. To contradict this statement, you have to remember that India is a growing economy with good potential for real estate.

Investment needed – Rs. 30 lakh – Rs. 1 crore

Tenure – 10-15 years

Expected return – 20-25% p.a

Taxability – Short term or Long term capital gains tax

Type of Risk – Capital risk, Liquidity risk

Few points to remember

  • High risk does not always mean high returns.
  • Asses the risks properly before investing in any financial product.
  • Invest according to your goals.
  • Always diversify
  • Amit

    20-25% returns from Real Estate over 10-15 years is way too optimistic. Further if a loan is used to finance the investment then returns are hardly 10-11%. Many example calculations are available on the net.

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