Smartly manage risks to get the most of every investment

Published On: 09-Feb-2021

Create wealth by smartly managing risks

Like the landscape of beaches and deserts constantly being altered by sea-waves and desert winds, the investment landscape throws up many unexpected surprises. While it may not be apparent to many investors, but each investment option comes with its own set of unique risks that lead to unexpected pleasant and not-so-pleasant results. Thus, the challenge is to manage the risk from the uncertain outcomes for investments for major financial goals like children’s higher education and retirement in a way that ensures persistent growth. To do it you need to ensure that you grasp the essentials about risk associated with investments and its relationship with returns.

Understanding Risk

What is Risk?

A simple way of understanding risk is that it is the possibility of actual returns ending up being different from expected returns. Greater the possibility of actual returns varying from expected returns, greater the risk. Thus, equity investments have a higher risk compared to fixed income investments such as a fixed deposit (FD) or a debt fund investment.

What every investor must know about risk

Ideally, investors will not want the divergence between expected and actual returns. However, the reality is that every investment has its own set of risks which makes this divergence a reality that investors have to live with. It is just the degree of divergence of returns that significantly depends on the investment. Thus, a 7% per annum interest paying bank FD may not witness any divergence between expected and actual returns. However, an equity investment may return 5% p.a to an investor who expected a higher return, say 10% p.a. The same investment, over a longer time period, could deliver 12-14% p.a.

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Mutual Fund Investments are subject to market risks, read all scheme related documents carefully.