Investing is a way of putting your money to work for you, with the hope of earning more income or capital gains in the future. However, investing also involves some degree of risk, which means you could lose some or all of your money if things go wrong.
Fortunately, there are some types of investments that are considered to be very safe, or even risk-free, meaning that you are almost certain to get your money back, plus some interest or dividends. These investments are ideal for conservative investors who want to preserve their capital, or for short-term goals that require liquidity and stability.
In this article, we will explore some of the best risk-free investments that guarantee profit in the world, and how you can use them to achieve your financial objectives.
What are Risk-Free Investments?
Risk-free investments are those that have no chance of defaulting or losing value, and that offer a predictable and guaranteed return. In other words, risk-free investments are those that have zero credit risk and zero market risk.
Credit risk is the possibility that the issuer of the investment will fail to pay back the principal or interest on time, or at all. Market risk is the possibility that the price of the investment will fluctuate due to changes in supply and demand, interest rates, inflation, or other factors.
Of course, in reality, there is no such thing as a truly risk-free investment, as there is always some possibility of unforeseen events that could affect the value or safety of any asset. However, some investments are so close to being risk-free that they are widely accepted as such by investors and financial experts.
What are the Benefits of Risk-Free Investments?
Risk-free investments offer several benefits for investors, such as:
- Capital preservation: Risk-free investments protect your principal from any loss, which is important if you cannot afford to take any chances with your money, or if you need to access it in the near future.
- Steady income: Risk-free investments provide a regular and predictable stream of income, which can help you meet your living expenses, or supplement your other sources of income.
- Diversification: Risk-free investments can reduce the overall risk and volatility of your portfolio, by balancing out the higher-risk and higher-return assets that you may own, such as stocks or real estate.
- Inflation protection: Some risk-free investments, such as Treasury Inflation-Protected Securities (TIPS), are designed to adjust their interest payments and principal value according to the rate of inflation, which can help you maintain your purchasing power over time.
What are the Drawbacks of Risk-Free Investments?
Risk-free investments also have some drawbacks that you should be aware of, such as:
- Low returns: Risk-free investments offer lower returns than riskier assets, which means you may not be able to achieve your long-term financial goals, or keep up with the rising cost of living, by relying solely on them.
- Opportunity cost: Risk-free investments may prevent you from taking advantage of higher-return opportunities that may arise in the market, or from benefiting from the power of compounding over time.
- Tax implications: Risk-free investments may be subject to income tax, capital gains tax, or other taxes, depending on the type of investment and your personal situation. This can reduce your net return and affect your after-tax income.
- Liquidity risk: Some risk-free investments, such as certificates of deposit (CDs) or Series I savings bonds, may have restrictions or penalties for early withdrawal, which can limit your access to your money if you need it before the maturity date.
What are the Best Risk-Free Investments in the World?
There are many types of risk-free investments available in the world, but some of the most popular and widely used ones are:
U.S. Treasury Securities
U.S. Treasury securities are debt instruments issued by the U.S. government to finance its spending and operations. They are considered to be the safest investments in the world, as they are backed by the full faith and credit of the U.S. government, which has never defaulted on its obligations.
U.S. Treasury securities come in different maturities and interest rates, depending on the type of security and the market conditions. The main types of U.S. Treasury securities are:
- Treasury bills (T-bills): These are short-term securities that have maturities of four, eight, 13, 26, or 52 weeks. They are sold at a discount to their face value, and the difference between the purchase price and the par value at redemption is the interest income. T-bills are ideal for investors who want to park their money for a short period of time, or who want to take advantage of changing interest rates.
- Treasury notes (T-notes): These are medium-term securities that have maturities of two, three, five, seven, or 10 years. They pay a fixed interest rate every six months, and the principal is repaid at maturity. T-notes are suitable for investors who want to lock in a steady income for a longer period of time, or who want to hedge against inflation or deflation.
- Treasury bonds (T-bonds): These are long-term securities that have maturities of 20 or 30 years. They also pay a fixed interest rate every six months, and the principal is repaid at maturity. T-bonds are appropriate for investors who want to invest for the long term, or who want to diversify their portfolio with a low-risk asset.
U.S. Treasury securities are highly liquid, meaning that they can be easily bought and sold in the secondary market, without affecting their price or value. They are also exempt from state and local income taxes, which can increase their after-tax return.
However, U.S. Treasury securities are subject to federal income tax, and they may also be subject to interest rate risk, which is the possibility that their price will fall when interest rates rise, or vice versa. This can affect the market value of the securities if you need to sell them before maturity.
Money Market Funds
Money market funds are mutual funds that invest in short-term debt securities with high credit quality, such as Treasury bills, commercial paper, or certificates of deposit (CDs). They aim to maintain a stable net asset value (NAV) of $1 per share, and to provide a low but steady income for investors.
Money market funds are ideal for investors who want to keep their money safe and liquid, or who need a temporary place to store their cash while waiting for other investment opportunities. They are also useful for investors who want to diversify their portfolio with a low-risk asset, or who want to reduce their exposure to market fluctuations.
Money market funds are regulated by the Securities and Exchange Commission (SEC), which imposes strict rules on the quality, maturity, and diversification of the securities they hold. They also offer some protection to investors, as they are required to maintain a minimum level of liquidity, and to disclose their holdings and performance on a regular basis.
However, money market funds are not insured by the Federal Deposit Insurance Corporation (FDIC), which means that they are not guaranteed to return your principal or interest in the event of a fund failure. They are also subject to fees and expenses, which can reduce their net return and affect your income. Moreover, they may not be able to keep up with inflation, as their interest rates are typically lower than the rate of inflation.
Treasury Inflation-Protected Securities (TIPS)
Treasury Inflation-Protected Securities (TIPS) are a special type of U.S. Treasury security that are designed to protect investors from the effects of inflation. They offer returns based on two interest rates:
- A fixed rate that remains the same for the entire term of the security, which is paid every six months.
- A variable rate that is adjusted every six months according to the change in the Consumer Price Index (CPI), which is a measure of inflation.
The principal value of TIPS is also adjusted according to the rate of inflation, which means that the amount you receive at maturity will be higher or lower than the original amount you invested, depending on whether inflation was positive or negative during the term of the security.
TIPS are suitable for investors who want to hedge against inflation, or who want to diversify their portfolio with a low-risk asset that offers a real return. They are also backed by the full faith and credit of the U.S. government, which makes them very safe and reliable.
However, TIPS are subject to federal income tax, and they may also be subject to state and local income taxes, depending on where you live. They are also subject to interest rate risk, as their price will fluctuate according to the changes in market interest rates. Additionally, they may not be able to fully protect you from inflation, as the CPI may not reflect your personal inflation rate, or the inflation rate of the goods and services you consume.
High-Yield Savings Accounts
High-yield savings accounts are bank accounts that offer higher interest rates than traditional savings accounts, in exchange for some restrictions or requirements, such as maintaining a minimum balance, making a minimum number of transactions, or using certain services or products from the bank.
High-yield savings accounts are perfect for investors who want to earn a higher return on their cash, while keeping it safe and accessible. They are also insured by the FDIC, which means that your money is protected up to $250,000 per depositor, per bank, in case of a bank failure.
However, high-yield savings accounts are subject to income tax, and they may also have fees or charges, such as monthly maintenance fees, withdrawal fees or transfer fees, that can reduce your net return and affect your income. Moreover, they may not be able to keep up with inflation, as their interest rates are usually lower than the rate of inflation.
Another type of risk-free investment that guarantees profit in the world is:
Certificates of Deposit (CDs)
Certificates of deposit (CDs) are bank products that offer a fixed interest rate for a specified period of time, ranging from a few months to several years. They are similar to savings accounts, but they have higher interest rates and lower liquidity.
CDs are ideal for investors who want to earn a higher return than savings accounts, while keeping their money safe and insured by the FDIC. They are also suitable for investors who have a specific time horizon for their investment, or who want to take advantage of rising interest rates by locking in a higher rate for a longer term.
However, CDs are subject to income tax, and they may also have penalties for early withdrawal, which can reduce your net return and affect your income. They are also subject to reinvestment risk, which is the possibility that you will not be able to reinvest your money at the same or higher rate when your CD matures. Additionally, they may not be able to keep up with inflation, as their interest rates are usually lower than the rate of inflation.