Understanding Option Chain

Investment Options – 7 High Risk Options Retail Investors Should Avoid

As a retail investor, we have ample Investment Options. It’s a no-brainer that high risk means high return. Unfortunately, it also means that you can also lose your capital. While writing this post, I was in a dilemma to decide the title of the post. The confusion was whether i should keep a title High Return Investment options or High Risk Investment options. The phrase high return investment options capture more eyeballs but i decided against it. My personal investment philosophy is that capital protection comes first. In short, without losing capital or money, how to maximize returns? This is the reason, the title of this blog is “Smart Ideas for your Money”.

Recently, i received a query from one of the readers. He mentioned that he would like to invest amount X and generate a monthly income of Y. In other words, he was looking for investment options that can potentially generate an annual return of 35% to 40%. He asked me, whether it is possible to generate this kind of returns? The answer is definitely YES.

The million dollar question is whether the retail investor has skills/expertise to generate this kind of returns and can he afford to lose his money? If the answer is NO then he should not explore investment options with high risk. As a smart investor, i am happy to take calculated risks and more than happy with double digit returns of 15% to 18%. Some investors would like to double their money in one year. It is similar to ask, whether a human being can complete 100-meter distance in less than 10 secs or say within 20 secs. The answer is definitely YES because many people already did it. Unfortunately, i cannot cover because i don’t have right skill sets/stamina for the same.

I am highlighting the 7 high risk investment options that retail investors should avoid. Some of these investment options can potentially generate very high returns but i am of the opinion that retail investors don’t have high risk appetite. Thus, they should avoid or get lured by the potential returns (High).

The best way to market these investment options is to project their potential returns. For example, one of the builders is marketing his project by saying “Double your money in Three Years”. The project is in pre-launch phase. Unfortunately, the investors fail to gauge the potential risk thus trapped in greed to generate high returns.

Investment Options – 7 High Risk Options Retail Investors Should Avoid

1. Intraday Trading:

Trust me it is one of the riskiest investment options. I wrote a post, 5 tips for intraday trading. In that post also i cautioned the investors against intraday trading. This option is suitable for seasoned traders. The biggest problem with intraday trading is that the margin money requirement is low. For example, i can buy a stock worth Rs 100 for just Rs 10. Normally, the retail investor is not able to gauge the impact of the loss. If the profit is 10 times so as a loss. Therefore, it becomes a gamble.

Every investor has a risk appetite to absorb the quantum of loss. In intraday trading, a retail investor takes positions beyond the risk appetite. In my opinion, intraday trading is not for retail investors but for stock traders and market makers.

2. Sectoral Mutual Funds:

As per financial planners, it is one of the top 3 high risk investment options. If your bet goes wrong then you can expect even sharp losses. Sometimes fortunes of the particular sector change suddenly. A recent example is IT or Information Technology sector. The IT stocks were the darling of mutual fund house a few months back. After Brexit and couple of big clients exit turned the fortunes upside down. The mutual funds are offloading their stake in IT stocks and these stocks are out of favor. As IT sector funds will have almost 100% exposure in such stocks, therefore, risk is highest. The funds with less exposure may not feel the heat.

The banking stocks are performing well, therefore, the best performing sector mutual funds are banking whereas infrastructure is one of the worst performing sectoral mutual funds. The IT sector funds are expected to perform badly in near future because of the downward revision in future guidance and exit of some high profile clients.

3. Company FD’s:

There is a long list of corporate who defaulted/delayed on their FD payments. The names include Unitech Ltd, Jaiprakash Associates Ltd, Ansal Properties, Elder Pharmaceuticals etc. There is a list of 16 such companies. In my post, Should i invest in Company Fixed Deposits? i highlighted in detail the risks associated with the company fixed deposits.

The worst part is risk reward in case of company FD’s is highly skewed towards risk. The reward is just 2% to 3% higher interest rate than the bank FD’s but risk is 100% capital loss i.e. in the case of payment default. At least in the case of intraday trading, risk reward is equally poised i.e. probability of return and risk are equal.

In my opinion, it does not make sense to risk your capital for just 2% to 3% higher interest rate. Most of the AAA or AA rated company FD’s offer interest rate almost equivalent to bank FD’s of small private banks. Therefore, bank FD’s are a better option.

4. Pre-Launch Property:

As i shared in my posts on real estate that i come across cases wherein the pre-launch property is sold by the builder before the joint development agreement is signed with the landowner. In other cases, Commencement Certificate and Intimation of Disapproval are not in place. The reputed banks are yet to approve the project. Normally, the pre-launch price is only 10%-15% less than the launch price. A good marketing from builder makes potential buyers believe that they are getting one of the best deals.

In my opinion, retail investor should avoid the purchase of the pre-launch property. The property is high-value purchase and would you like to risk your life long savings for just 10%-15% discount. There are instances wherein property buyer’s 100% investment is stuck because of pre-launch discount greed. The pre-launch property is predominantly for big investors who buy in bulk and negotiate much better price than offered to the normal buyer.  Moreover, builders only listen to the big investors if anything goes wrong.

5. Peer to Peer Lending:

Peer to peer lending is similar to private lending. You can fetch an interest rate of as high as 40% depending on the risk. It is not regulated sector and RBI is planning to bring Peer to Peer lending under its ambit. Till the time there is a clarity on rules and regulations. It is one of the high risk investments options to fetch higher interest rate.

In my opinion, it is suitable for big investors who will not mind if a couple of loans go bad out of 10. So effective return still remains 20% to 25%.

6. Closed-ended Mutual Funds:

The biggest risk of closed ended mutual funds is what if the market is in a downtrend at the time of maturity. Secondly, if the fund is not performing well during the lock-in period then you can’t exit. Some of the closed ended mutual funds can be traded on an exchange but volumes are very low and you have to sell at a heavy discount against the current NAV.

These schemes are marketed as investment options with lock-in period for long-term investments. In my opinion, lock in period is okay for debt investment options but not for equity-linked investment options. Reason being, equity investment options are highly volatile and timing is very critical. In the case of closed ended mutual funds you cannot time the exit therefore it should be avoided.

7. Forex and Commodities:

I will share a separate post on forex and commodities. For the time being, based on my personal experience i can say that both are high risk investment options. It requires a lot of knowledge and understanding to trade in forex and commodities. In commodity, the monsoon play crucial role and monsoon is highly unpredictable. On the other hand, forex depends on international factors and these factors are too complex to understand. The X currency movement impacts Y currency and so on. For example, recently pound crashed 6% in just 2 mins impacting other currencies. Therefore, forex and commodities are highly volatile investment options. In forex, the safest bet is a dollar and in commodity, gold is least volatile. Many investors prefer silver but it is also highly volatile.

Words of Wisdom:

As a retail investor, i should venture into high risk investment options only if i understand the rules of the games. Always remember that there are no shortcuts to becoming rich. On the other hand, it’s a myth that to become rich you have to take high risks.

I do agree that we have to take risks while making investment decisions. The only catch is that the successful investors take calculated risks rather playing a blind game. At the macro level, high risk investment options are as good as gambling. Therefore, if you are okay to gamble with your money then the sky is the limit on both sides.

Copyright © Nitin Bhatia. All Rights Reserved.

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