Risk Management
All investment products has an element of risk attached with them. The type of risk, however, varies from one product to another. Risk is the uncertainty that has the potential to negatively affect one’s investment.
Risk can be classified as
- Market Risk (the value of the investment depends on the market condition)
- Default Risk (the probability that the investor will get back his money)
- Business Risk(whether the company in which one has invested, will be merged or whether the corporate decisions will have favorable implications)
- Liquidity Risk (how readily money will be available when required)
- Inflation Risk (whether the inflation rate will exceed the return rate)
- Concentration Risk (whether the ratio invested in a particular product is beyond optimal)
- Currency Exchange Rate Risk (whether the exchange in currency rates will be favorable)
Higher the Risk - Higher the Return
It is also good to know that with higher risks comes the potential for higher returns and no product is risk-free. And here comes the necessity of managing the risk. The simplest way is to analyze one’s financial goals and then allocate the resources accordingly in different products to reap the benefit of diversification and these will help to realize optimal benefits from all products.
