10. Know and learn the types of Risk.

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·      Risk is the potential of gaining or losing something of value.

·      It can also be referred as chances of having an unexpected or negative outcome.

·      Financial risk is the possibility of not earning the expected return.

The quantum of such risks depends on the type of financial instrument.

All the asset classes of investments are prone to some or other type of risk.

·      Different types of risk associated with various asset classes can be explained as below:

1.    Equity investments are subject to market and business risks.

2.    Debt investments involve inflation risk, default risk and reinvestment risk.

3.    Cash and its equivalents are subject to lower returns risk

4.    Commodities are subject to changes in demand and supply cycle risk.

5.    Real estate, currency and gold are related to economic cycle risk.

·      So investment should be made after understanding risk and return features involved in various asset types

Ø  For short term goals, cash and it’s equivalents should be preferred

Ø  For medium term goals, income assets (Debt instruments) are preferable

Ø  For long term goals, growth assets (equity investments) which appreciate in values and offer higher returns should be considered.

·      Thus risk management becomes essential before taking investment decisions.

·      It can be done through risk profiling which shows the willingness of an individual to take and accept the risk involved.

A risk profile is important for determining a proper investment asset allocation for a portfolio.