ALL ABOUT ‘RISK‘!
For most of us, the sheer mention of the word risk, invokes a negative feeling offer, loss and volatility embedded in it.
Very few people associate risk with the prospective reward or gain it can fetch if the risk is undertaken and has been successfully encountered.
At every stage and aspect of our life there is an element of risk and uncertainty attached in what we do. The one aspect which most of us associate ‘RISK’ in its entire form is in the field of finance. The golden words ‘Money and Wealth’ trigger a bout of ‘RISKERIA‘(a commonly found financial disorder in investors).
Now this may hold true for individuals who are not financially savvy (unfortunately majority of them are not!) but the enlightened individuals are the ones who have conquered their bouts of ‘RISKERIA ‘and moved on with their finances positively.
There are lots of apprehensions and notions about this subject which is mainly attributed to lack of awareness and knowledge.
Let’s clear the dust as much as we can…
To quote the legendary investor Warren Buffet on this subject would be apt here…
‘Risk is not knowing what you are doing’ – Warren Buffet
Thus, if we are aware of the inherent risks and the associated return, then our expectations from investments would be more realistic.
There are mainly two types of fundamental risks which are prevalent in the financial world: –
Systematic Risk and Unsystematic Risk.
This is primarily the risk which is caused by external factors which affects the returns generated by investments across all forms of securities. These are the macroeconomic factors such as social, political or economic factors. The effect of these factors plays a role across the markets universally. Systematic risk is caused by the changes in government policy, a natural disaster, changes in the nation’s economy, global economic events etc. The risk may result in the fall of the value of investments over a period till the effect is evident.
The risk arising due to the fluctuations in the performance of a company’s financial status due to the micro-economic factors, i.e. factors existing in the organization, is known as unsystematic risk.
This is an internal risk and is limited to that organization only. The risk cannot be avoided but can be mitigated or reduced by employing certain dynamic processes and policies. The company policies or at times the reaction of a company to an external situation plays a crucial role in either aggravating or reducing the risk of that company’s Guide to Financial Planning.
Apart from these two fundamental parameters of risk as explained above, individuals desirous of setting their first steps in the financial markets or who yet are procrastinating, need to understand one simple statement which is best conveyed through a famous saying –‘The biggest risk you take in life is not taking a risk‘.
Thus, in the case of investing too, the sooner you first understand that there is a certain degree of risk in every product (including sovereign guaranteed products – as we have witnessed weaker economies crash at times) and secondly the gains are directly proportionate to the level of risk you are willing to undertake, the better will it be for you to tread the investment path successfully.
Yes, we know that SEBI Registered Investment Advisor in equities is froth with risk, but we cannot ignore the above average returns it has delivered for the patient long term investor. The question is at what level of risk?
This boils down to a couple of crucial factors which need to be considered prior to the commencement of the investment.
If the asset allocation has been done i.e between Fixed Income. Equity and Real Estate Planning India in sync with your current lifestyle and time based financial goals, and then the investor would ideally be risk insulated as he has more or less understood his present and future path of finances. Consider a situation where you have invested in an equity mutual fund scheme for a 10-year horizon to fund your child’s educational funding after 10 years. Even if there is a major fall in the capital markets and your investment value takes a hit, you can still be comforted by the fact that you will require the funds after 10 years by which time the economy of our country would double or triple and as a consequence also benefit your long-term investment in the equity scheme.
There are other various notions of risks in the mind of an investor which are rather behavioural by nature. For some individuals, investments in real estate are safe, while some swear by equity as their best bet. Fixed income (FD’s for the layman) are yet the GO-TO investment products for their ‘SAFE NATURE ‘ ( who cares about inflation though ! )…
Hence, to summarise RISK is omnipresent and we need to encounter it all the while in the financial world. The way to manage it effectively is by being aware of it and having a balanced and disciplined approach in our financial profile.
Kalpesh Ashar is a professional writer and a widely published author on a variety of topics including finance, investments, insurance & accounting.