How to avoid risky investments

Avoid Investment Risk: You always have the option to avoid investment risk by choosing only safe, guaranteed investments. Choosing to avoid investment risk is one of the smartest decisions you can make until you have learned the skills you will need to manage risk appropriately.

Diversify Your Investment Risk: Managing investment risk through diversification, simply said, is “Do not put all your eggs in one basket.” This is the traditional approach to investing that you’ll see promoted by many financial advisors and popular personal finance magazines and books. Investment diversification is important. I advise you do it. I also advise you understand its limitations. Diversification does help reduce investment risk, but you must remember that the long term results of a diversified set of investments are far from certain.

Only Take Calculated Investment Risks:

  • Logical vs. Emotional Approach: Employing a calculated risk taking strategy takes knowledge, research and common sense. It is not an autopilot approach. To learn how to take calculated risks you have to understand how to view markets from a logical and rational approach – not an emotional one. You also need to understand certain ratios and indicators you can use to help you assess the market.
  • Using financial ratios & yield curves: One ratio that some financial professionals use in an attempt to determine if the stock market is overvalued or undervalued is the price to earnings ratio, or P/E ratio. Another indicator of recessions is the yield curve. The process of making investment decisions based on a calculated form of risk taking is often referred to as tactical asset allocation.
  • Insure Against Investment Risk: The last strategy you can employ to manage investment risk is to insure against it. If you have car insurance, homeowner’s insurance, health insurance, or any other type of insurance, you are already familiar with this approach. With traditional forms of insurance there is a cost (the premium you pay) to insure that specified losses are covered. Insurance on investment returns works in a similar manner, and is often accomplished with the purchase of an annuity. With a fixed annuity (and things called immediate annuities and indexed annuities) your “cost” is that you forego higher returns in exchange for a guaranteed outcome. With certain variable annuities, you are charged an annual expense in exchange for a specific guarantee about the amount of money you can withdraw in the future. These guarantees often go by the name of a “lifetime withdrawal benefit” or “guaranteed withdrawal benefit”.

How to mix investments

Investments are mixed basically for two reasons:

Achieving financial goals

For example: Short term investment, long term investments etc.

To reduce risk through allocation of assets.

Asset allocation: The objective of asset allocation is reducing risk of putting all eggs in one basket. Asset allocation to a large extent depends on the time horizon you have in mind, and how much risk you can afford to take. Usually, younger people have longer time horizon, and hence they can invest major portion of their money in equity. While older people cannot afford to invest a large amount in equity, because of high risk associated with it. Asset allocation or diversification helps investors diversify the risk, because different asset classes are not impacted in the same way by market fluctuation.

For example: The impact of market fluctuation is highest in equity, less in bonds, and almost nil in bank accounts and government scheme. Macro-economic factors such as interest rate and inflation impact bonds and bank accounts more, but have less impact on equity.

Using Diversification:

  • Investing on different types of companies: One way to diversify investment can be investing on companies that represent different sectors of the economy

    For example: Technology companies, manufacturing companies, pharmaceutical companies, and utility companies.

  • Buy Shanchay patra from different issuers: Similarly, if you're buying bonds, you might choose bonds from different issuer and corporations as well as those with different terms and different credit ratings.
  • Short term bond vs. Long term bond: Similarly, there are periods when intermediate-term bonds—Government Bonds-provide a stronger return than short- or long-term bonds from the same issuer. Rather than trying to determine which bonds to buy at which time, there are different strategies you can use.

    For example: You can buy bonds with different terms, or maturity dates. This approach involves investing roughly equivalent amounts in short-term and long-term bonds, weighting your portfolio at either end. That way, you can limit risk by having at least a portion of your total bond portfolio in whichever of those two subclasses is providing the stronger return.

How to Plan investment to meet your financial goals

Why invest? Saving is, and always will be, the foundation of any fortune. It is secure, risk-free and readily accessible. But saving alone is not enough to make your money grow. You should also invest. This means taking some risks, but the rewards are higher. When you save and invest, your money has the power to grow faster.

Prioritizing financial goals can feel like pitting one dream against another: Would you rather purchase a home or pay off student loans? Would you rather send your kids to college or be able to retire? Would you rather attend a friend’s destination wedding or buy a car? But with smart planning, you can increase the odds of achieving most – if not all – of your aspirations.

Here are some common financial goals, and investing strategies that may help turn your plans into reality:

Short-term investments Smaller goals, such as saving for a vehicle down payment, can be a great first investment opportunity. If you’re looking to purchase a car in the next one to two years, there are several relatively safe short- term investments that can help you accumulate a few hundred or a few thousand dollars. Look for investment vehicles with short-term maturity dates or options that allow you to access funds without penalty, such as a Short Term Deposit. Also, consider investing in Government Savings Bonds that have a maturity that matches the timeframe in which you want to make the purchase. DPS for 6 months to 1 year is also a short-term investment.

Short- to mid-term investments Purchases you want to make in the next two to five years, such as making a down payment on a home, can be partially funded by short- or mid-term investments. In addition to the short-term investment options listed above, consider DPS or FDR, which can give you a considerable rate of return with relatively low risk, and potentially increase in value the longer your money is invested. Mid- to long-term investments

Goals between five to ten years in the future, such as funding a child’s college education or buying a new home, may offer you the opportunity to take a little more risk in your portfolio. Riskier investments, such as stocks, have the potential to offer higher longer-term growth than more conservative investments.

Longer-term investments

Some of life’s biggest goals, such as retirement, require longer-term planning. From the moment you graduate from college and enter the workforce, you want to put retirement on your financial agenda – the key is finding the right long-term investment strategy for your specific situation. A good rule of thumb is to have a higher ratio of riskier to conservative investments when you are younger and then increase the percentage of more conservative and income-generating investments as you age. This can help you get the most return on investment in your younger years when it makes more sense to take financial risks.

By choosing investments that complement specific goals, you can improve the odds of achieving your objectives without compromising the other priorities in your life.

How to Invest Fixed Deposit Receipt (FDR)

Fixed Deposit Receipt (FDR):

  • What are FDR? A fixed deposit receipt (FDR) is a financial instrument provided by banks in Bangladesh which provides investors with a higher rate of interest than a regular savings account, until the given maturity date. The defining criteria for a fixed deposit are that the money cannot be withdrawn from the FDR as compared to a recurring deposit or a demand deposit before maturity. If you break the account before maturity, you would not receive the interest money but only the original sum of money which you deposited.
  • Benefits of FDR: They are considered to be very safe investments. In Bangladesh, FDR is used to denote a larger class of investments with varying levels of liquidity. Usually FDR is characterized by a deposit of large sum of money over a defined period of time which would make your money grow as you would receive interests on the deposited amount. However, it's important to note that banks may offer lesser interest rates under uncertain economic conditions.

How to Invest stocks

Stocks:

  • What are stocks? One of the oldest and most traditional ways to invest is to buy stocks and shares in a company, which form the asset class more commonly known as equities. Historically, stocks have outperformed safer investments like bank accounts and bonds and can act as the real driver for growth in your investment portfolio. Stocks/ equities give you a greater potential for growth. But they also come with a higher investment risk. Generally, the more years until retirement and the longer you have to ride out short-term changes in the market the bigger the role stocks could play in your investment mix.
  • The benefits of buying stocks: Shares are issued by companies as a means of raising money. Essentially, companies are selling part of their business to investors, and shares offer people outside the company the opportunity to receive profits if the company is successful. As you have become a part-owner of the company, you have certain voting rights and are given additional benefits beyond the receipt of profits. But generally, you have very little say in how the company is run.
  • High Risk: However, investment in shares exposes you to the potential to lose some, or all, of your money. Shares are seen as the riskiest asset class, so you should take extreme care when you consider investing in equities and the different types available.

How to Invest Shanchay Patra or Bonds

Shanchay Patra or Bonds :Also known as fixed income investment, Sanchay patra is generally less risky then stocks, so tehy can help offsst some of the investment risks stock can create.

Risks and return: The potential risk and return on bonds is moderate - generally lower than stocks, but higher than short-term investments. In general, bond prices rise when interest rates fall, and vice versa. This effect is usually more pronounced for longer-term securities.

How to Invest DPS

DPS: DPS essentially forces you to save on monthly basis. Saving Tk500 or Tk1000 every month is fairly achievable for most of us. However, if one fails to pay monthly DPS on consecutive basis, depending on the terms and conditions, he or she might have to pay fine, or the account might get cancelled. The monthly installment can be as low as BDT 500 or any multiples of it i.e. BDT 1,000, BDT 2,500, BDT 5,000 and so on.

Benefit: At maturity, it pays off a handsome amount of money. DPS can give you the convenience of saving regularly in line with your monthly income stream. So, if you want to create a big savings to fulfill your cherished dream, DPS is the right solution. DPS can have a range of options for both installment size and maturity.

  • UCB offers special DPS for women, which pays a better rate of interests than normal DPS.
  • UCB also offers NRB DPS for nonresident Bangladeshis, allowing them to save for a better future.

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