Things You Should Know About Risk and Your Investments

“A ship is always safe at the shore – but that is NOT what it is built for.”

who said this?? And is he talking about ship or something else?? Albert Einstein said this 75 years back but I am sure this can be applied to our life, career & definitely investments.

We invest so that our money earns more money – I think NO. We invest so that we can achieve our goals – now you decide the investments which can help you in achieving your goals.  But of course there is some trade-off between risk and investment returns – mostly higher risks are associated with higher returns or vice versa. (But… – what is Risk?) It is important to understand risk and risk management associated with investments.

 💡 Risk is an integral part of investment

If you have to get a job, you have to attend an interview. There is a risk that you might not do well in the interview or there are candidates better suited to the role. So there is an element of risk involved. Similarly, it is difficult to find out an investment option that gives returns with zero risk.

When you buy real estate, there is the risk of prices going down or prices remaining same or you may not be able to sell it when you will require money. When you do investment, risk will be there. It is important to understand the risks involved in different types of investment and decide the most appropriate ones depending on how much risk you can financially take and how tolerant you are to risk.

 💡 Risk and Volatility are different concepts

Volatility means the value or price of an asset rises and falls sharply in regular intervals. Risk is the potential of loss in investment. High volatility does not mean high risk and at the same time, low volatility does not mean low risk. In short-term volatility in prices can affect you as if you want to sell and get money in the short-term. But if you will focus on the Goals – you will be able to digest volatility to some extent.

 💡 Inflation is a risk to investments

Inflation means rising prices. It erodes purchasing power. Savings in your bank account earns 4% per annum. But if inflation is 6% per annum, your savings will lose value every year. The value of Rs. 50000 today will be lower one year down the line and even lower 2 years from today. Investments made for retirement have to be reviewed regularly. If  inflation is high, the amount that would be available for you at retirement will not be sufficient to sustain your lifestyle and achieve goals.

Moreover there is always a risk of losing money in investments. Even the “safest” investments have some element of risk. Therefore it is important to create a balanced investment portfolio of savings and investments. Investments should be done on the basis of risk capacity and risk tolerance and they should be managed properly.

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