Capital market investments can also be risk free

Capital market investments

Capital market investments can also be risk free

Most of us who are not well aware of the various financial instruments and techniques tend to think that investing in capital market requires an appetite for risks, but this is not true. The capital market comprises of two tranches- the equity market and the debt market. The equity market involves things like IPOs, public limited companies, etc. whereas the debt market is the part of capital market where companies come to raise money without selling their shares and rather paying an interest on the money raised through the investors. In simple terms, the debt market is a place where companies come to take loans from a group of investors of institutions that have extra capital and in exchange of the funds received the company pays interests on the principle amount raised.

Debt market has instruments like bonds, treasury-bills, government securities, etc. These instruments can be risky as well as risk-free. The risks of these instruments are also measured by the credit ratings provided to them by agencies such as CRISIL and ICRA. Governmental organisations such as RBI also participate in the debt market to raise and inject money. Many organisations such as RBI tend to provide debt market instruments such as long term bonds that are essentially free of risk. The debt market also comprises of the money market which encompasses all the short term debt instruments like treasury bills and g-secs that last from 2-365 days. For individuals who are looking to make a risk-free Stock market investment for a short period of time, money market instruments are appropriate

Debt market instruments, both short term and long term, have risky and risk free options that can cater to the specific needs of the investor. Indian individuals who have excess funds tend to loan their money through private brokers and/or keep the money idle in their savings bank accounts, because many of them don’t have the information regarding these risk free investments methods. Lending out money through private brokers can earn you a higher interest rate than the risk free debt instruments but you have to factor in the advantages of investing in the debt market instruments like liquidity and safety of the principle amount. While it is very difficult to have a risk free portfolio in the stock market it is easily applicable to do so through the debt market. A passive or an inactive investor who does not have a financial background can also invest in risk free debt instruments through debt based mutual funds that require essentially no time.

One of the prime saying in the world of commerce is ‘higher the risk higher the return’, and this saying applies here as well. If you select risk free instruments you effectively will fetch lower interest gains on those investments as compared to the ones that include some kind of risk but for a risk-averse investor these instruments can be the way to construct an effective and efficient portfolio.

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