Equity Investment for the Risk Averse

As an extremely risk averse person you still want to invest in equity markets but not want to put your principal at risk at any point of time. At the same time also want to dabble around with equities, but are afraid to do so. Equity Investment for the Risk Averse, this is the problem we will tackle in this blog.

Or imagine this, you saved enough for a goal and have this principal parked in a bank. Is there a better way of parking that money safely while trying to gain an extra return?

Or you got a bonus and you do not know what to do with it immediately and are worried that you will spend it away. How can I give myself a chance to gain an alpha without risking the capital?

The idea we will dabble with is very simple. Keep your Principal saved in a high quality “periodic interest” generating product (Bond, Post office monthly income scheme).  Invest only the interest coming out on the periodic basis into Equities. Does that sound like a simple, neat and elegant way? But does it create a big alpha?

Let us look at what the data tells us, if we do this for a period over 5 years (5 years is the lock-in period of the POMIS scheme). We will compare the two scenarios here:

By putting only the interest at Risk, we MIGHT BE able to generate (with assumption of 10% return on markets) an alpha of approximately 14K.  Finally, remember always that the amount invested in Equities have high market risk and this value is not a guaranteed return. This is one way to invest in Equities without putting entire principal at risk.

Note – Some assumptions are made in this calculations.

1. Interest income is not taxed upto 10K per year (current tax laws)
2. LTCG on equities beyond 1,00,000 per year is 10% (current tax laws)
3. Index return an average of 10% per year returns (based on historical evidence).