How to Manage Your Investment Risks
Investment Risk is the possibility of meeting danger or of suffering loss or harm. You cannot become rich without taking calculated risks. The first major proverb on risk says "Worry is not a sickness but a sign of health". If you are not worried then you are taking enough risk. Then another proverb says "Always play for meaningful stakes". In other words, you should take calculated risks to get best results. Life is filled with all sorts of risks, how you live depends on your risk management skills. There are risks in your career. Likewise, every investment opportunity is exposed to some risk or the other.
In some investment opportunities, a certain type of risk may be major, and others not so important. A full considerate of the various significant risks is essential for taking calculated risks and making rational investment decisions. Investing in the Stock Market has more of a risk factor than Gold , but stock market investments have a comparatively higher return investment than Gold Investment. There are six most important risks which may be present in varying degrees in different types of investments.
Market Risk
Stock Markets and the market dealing in corporate and government bonds are affected by falling and rising prices due to irregular bearish and bullish periods. There are a number of theories which partially clarify why the bear and bull markets keep alternating. Bearish stock markets usually precede economic recessions. Bullish bond markets consequence from low interest rates and low inflation rates. Bearish bond markets consequence generally from high market interest rates which, in turn, are pushed by high inflation rates. Thus experts consider that good economic forecasting is the key to anticipating changes in the bond and stock markets.
Business Risk
When you invest money in commercial industrial and business ventures, there is always the likelihood of failure of that business and then you may not get anything or very small, on a pro-rata basis in case of the firm is bankrupt. There could be a number of causes behind the failure of companies, like laborer problems, mismanagement, difficulties in marketing, shortage of raw materials, chronic shortage of funds, failure of technology, pollution related problems, power cuts, etc.
Default Risk
This is the most terrifying of all other risks. The risk of default or non payment refers to both the principal and the interest. For all unsecured loans, e.g. loans on the basis of company deposits, promissory notes, etc. this type of risk is very high. Since there is no security attached to the money you invested, you can do nothing except go to a court when there is a default in refund of payment of accrued interest or capital. Even if win the case in court, you will still be left wondering who ended up being better off than you, the borrower or your lawyer.
Given the present situation of huge delays in our courts you should really think twice before filing a suit to get back your dues. If you decide to go to court, you should be ready for a delay of at least 5 to 10 years. Even after getting a verdict it will take huge time, cost and effort to execute the announcement.
Interest Rate Risk
Interest rates in India were regulated by the RBI or the Government until recently. Hence, the investors were not exposed to the risks related to interest rate fluctuations. As a piece of reforms, interest rates are being slowly deregulated since then, interest rate fluctuation has become a general phenomenon with its resulting impact on investment values and yields.
Purchasing Power Risk
Inflation means being broke with a lot of currency in your pocket. When market prices shoot up, the buying power of your money falls down. Wherever inflation rates are fairly high, investors are robbed in broad day light. Some economists deem inflation to be a camouflaged tax. Among the third world countries, India is often esteemed for its efficient management of inflation. In recent times only a single digit inflation rate has been continued in India. This is supposed to be an admirable performance.
Political Risk
In an extremely regulated economy like India till 1991, the government is all authoritative; it may introduce legislation affecting some companies or industries in which one may be granting fixing ceilings of property, debt relief to certain sections of society, etc. One government may go and another come with a completely dissimilar set of economic and political policies. This common change of governments consequences in unstable economic policies and hence add to the risk faced by different economic entities.
All these six types of investment risks may not be present in any single investment or at one time. On the other hand, there may be other risks coupled with certain types of investment, for example, being cheated as in the case of many Chit Funds, the risk of theft in the case of jewelry etc. It is important for you to cautiously assess the existence of each category of investment risk, and its amount in whatever investment opportunity you may think about. To reduce the investment risk, it is advised to diversify investments on various High return Investment Plans. Please keep in mind that there is always some risk or the other in every investment option- no risk, no gain- what is essential is to clearly understand the degree and nature of risk present in a particular case - and whether it is a risk you can pay for, and are prepared to take.
