A beginner’s guide to understanding Risks

Any discussion on investments is almost incomplete without comprehending the risks involved in it. Risks and investment have a conflicting inverse relationship in terms of the assessing the profitability. The lower the risk, more lucrative is the investment. However, one can never refute the fact that higher the risk, better the returns.

What are Risks?

There are dividing opinions about risks and its measurements, which makes it difficult to have a substantial definition of the term. 

Investopedia.com defines risks as the possibility or probability of an asset experiencing a permanent loss of value or below-expectation performance. 

If an investor buys an asset anticipating a 20% return, the likelihood that the return will be below the expected rate is the risk of that investment.

Identifying where risk lies and the distinctions between low risk and high-risk investments is often a bone of contention for investors.

Defining low and high risks

To put it in simple words, low-risk investments are those where the potential losses are minimal and not as devastating as opposed to high-risk investments where the potential chance of loss of capital or underperformance is much higher.

Some low-risk investment options include Fixed Deposits, Life Insurance, Public Provident Funds, Government bonds etc. 

For investors with an appetite for risk, the alternatives include Equity funds, Direct equities, Unit-linked insurance plans, etc. 

Diversification is your answer

People who thrive on higher returns often invest heavily in the stock market, but risk-averse investors prefer investing in safer options. Whatever be your inclination, diversification is the key step in successful investing.

A collection of your investments is referred to as your investment portfolio. 

To minimise the effects of risks, have a diversified investment portfolio. Make sure your portfolio is a balanced one, to reduce significant losses as much as possible.

Investing in a judicious mix of assets across high risk and low-risk investments will also help your risk management strategy.

For instance, if you invest all your money in one stock, and the stock experiences a 30-40% loss, the impact of that would be massive. But if you have invested in a number of other options, then the drop in value won’t affect you as much.

A portfolio with investments having the same level of risks is also dangerous. For example, investing only in government securities, treasury bonds are all low-risk propositions but in the event of bankruptcy of the government, it will create a problem.  

The importance of diversification lies in the fact that it can help you sail through any economic crisis. The rationale behind having a wide variety of investments is that on an average, it would yield higher returns and lower the overall risk than the risk involved in a singular investment.

For more insights on investment plans, Cedrus Wealth Partners is here to help you. We understand the need of each investor and provide a suitable plan. We deal with a variety of your financial requirements in terms of wealth management, investment planning, tax planning, estate planning, and risk management through contemporary investment ideas and a well-structured approach.

We at CEDRUS WEALTH PARTNERS anticipate, understand and proactively solve your financial and investment planning problems by helping you in wealth creation, risk management, and tax efficiency.

Follows us on Social Media for regular updates.
Facebook/Cedruswealthpartners

Or Contact us +91 20-25512162

service@cedruswealth.com