Arti Arora, CFP | Head Financial Planner
The subject of return is discussed often but there are very few occasions when we talk about the risk of investing in a particular investment product.
There are different kinds of risks and predominantly speaking, every investment carries some risk. The broader forms of risk include the following:
Market Risk | Sector Risk | Industry Risk | Company Risk | Inflation Risk | Interest Rate Risk | Credit Risk | Risk of not earning above average returns and of course, Opportunity Risk
The term risk is mostly associated with equity and market related investments but that is not the correct and informed way to look at it. In the last edition, we discussed about the inflation risk and the risk of not earning adequate return that we take by investing in bank fixed deposits.
The risks of investing in market-oriented avenues include the market risk; i.e. the level of market indices going down as well as the company risk which is specific to the company you have invested in.
On the other hand, Credit & Interest rate risks are associated with debt-oriented investments wherein if the principal borrower defaults, that impacts the value of your investment. Therefore, we analyze the credit ratings of these investments before acting. While this too may not be fool proof, an analysis of the same puts us in a safer zone for sure.
Even the Post Office Schemes where returns are guaranteed carry an interest rate risk as has been seen historically and more lately during the COVID times, where the Government revised these returns steeply downwards.
Of all the types of investment risks, the biggest is the Opportunity Cost Risk but this is preventable by adhering to an efficient and a holistic financial advice customized to one’s specific situation. In India, the investment advice has been underrated but it is by far the most decisive factor that comes to play in your portfolios performance and goes a long way in you realizing your important financial goals.
Starting from risk profiling to the identification of one’s financial goals to detailed research on different investment avenues along witha sight of one’s portfolio performance, comparative analysis, timely review and corrective action, wherever and whenever required - a well found investment advisory process is underlying to your portfolio performance and must be adhered to religiously.