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.

What is Risk?

Let’s see the chart of living cost of middle class family –

• Risk is our rupee buys less than it does today ……..let`s see it with below chart

Year	Cost of living
1920 1940 1960 1980 2000	Rs. 1   Rs.10   Rs.100   Rs.1000   Rs.10000
2020	Rs.100000

•  There’s no investment in the world which gives higher returns without any risk.       

          > No risk, no returns 

          > Low risk, low return

• Risk isn’t investing in a right way and losing ground to inflation.

• Nothing is 100% safe, there are various types of risks in different asset class –

         > Fixed Deposit/Debt has “Default Risk” and “Interest Risk”

         > Real Estate/PPF/Other lock-in Schemes have “Liquidity Risk”

         > Equity has “Volatility Risk”

• Playing intelligently with volatility risk and interest rate risk is a way to be wealthy.

• If our investments are giving less returns after inflation and tax that is a risk of being poor in long-term.

•  Being a trader is risky, but buying and holding is not.

•  Risk is not achieving our dreams and aspirations.

Even a successful player or a wealthy person cannot be right every time…but managing risk intelligently and making our overall portfolio work rightly is important.