Conservative investors fall in low to moderate risk group with respect to their investment. Low risk tolerance prohibits them from investing in stock market and other investment avenues which have capital appreciation potential. Prime focus of conservative and low risk tolerance strategies remains on capital preservation.

I am presenting below a conservative investment strategy which aims at preserving the capital invested and decent growth in future.

 

Assumptions about the Investor

 

Type

Conservative investors with very low risk appetite

Investment Capital

2 Lakh (You can put a value as per availability of funds)

Components of investment

Bonds – 100%

Expected return

9% yearly

Risk Tolerance

Low

Time Horizon

At least 2 years

 

Ideal Investment Option and Allocation

Investment will be done in two corporate bonds and two debt funds. Invest 30% in corporate bonds and remaining 70% in debt funds.

 

Selection process for Bonds and Debt Funds

Corporate Bonds

  • Find 2 companies with bonds offerings
  • Check the following 
    1. No litigation or fraud case against the company pending in any court of law
    2. Credit rating (not below AA)
    3. Debt equity ratio (< 1)
    4. Existing interest coverage ratio (> 6)
  • Check the sector of the company (decide at run time if the sector outlook is good)

Debt Funds

  • Find two debt funds
  • Check the following
    1. Return of debt fund over last 3, 5, and 10 years. Choose the one with highest returns.
    2. Expense ratio – Lower the expense ratio the better the fund.
    3. Liquidity of the debt fund – Choose the one with better liquidity
  • Revisit the choices once in 6 months.

 

Important point

Corporate bonds and Debt funds provide safety of capital but low returns. Investors who want to preserve their capital with reasonable return should opt for this scheme. You need to monitor your investment at regular intervals so as to optimize your returns.

 

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