No-risk investments refer to mechanisms that allow investors to seek returns without the risk of losing their capital. The benefits of these types of investments are security and generally liquidity. The drawback, however, is that they usually offer low rates of return and are inadequate mechanisms for substantial growth.
No-risk investments are an ideal option when a person wants to protect her capital. There is generally no question as to whether a person should have no-risk investments. Most financial professionals advise everyone to include secure products in their portfolios. The factor that tends to vary is the percentage of no-risk investments that a person should have.
Short-term goals, such as acquiring a down payment for a car or a cosmetic surgery procedure, may be best achieved with no-risk investments. It is also a great idea to have these financial tools in the event of emergencies, because they are normally characterized by high liquidity, which means they allow a person to easily access cash when it is desired.
Although security is one of the definite benefits of no-risk investments, it is important to realize that there is a major drawback. Security is usually not rewarded very highly. Considering this, investors should realize that if there is no risk involved in an investment, then it is likely that the returns will be very low.
Different types of investment vehicles are used to serve different purposes in a portfolio. Investors should be aware that no-risk investments are not generally used as a part of a person's growth strategy. Due to their tendency to offer limited returns, they are not adequate in this regard.
A good example of no-risk investments are insured savings accounts. When a person invests money in this manner, she essentially allows a financial institution such as a bank or credit union to hold her money. If the money remains in the possession of the financial institution for a specified period of time, she is usually rewarded with interest. In most cases, however, she is under no obligation to leave her money in the savings account for any period, and she may withdraw the full amount deposited at any time. This type of investment is further secured with insurance, which is often provided by a federal authority that will reimburse her if something were to happen to her money, such as a bank fire or robbery.
Another example of investments in this category are certificates of deposit (CDs). These operate similarly to savings accounts, but they tend to offer a greater amount of return because they are usually subject to more restrictions. For example, in many instances a person is required to have a minimum investment amount, and she may not be be able to make withdrawals for a certain period unless she is willing to pay a penalty.