Intermediate

Everything in life carries an inherent risk. From any situation, if you want to reap rewards, you may have to take chances or expose yourself to some uncertainty. Similarly, when it comes to investing, risk and returns are two sides of the same coin. Stock market prices can move up or down depending on external factors. For example, the stock price of a company can jump up if foreign exports are rising or if the government passes favorable business policy and it can fall if the sales reduce due to change in consumer needs or if the government bans exports on goods.

The reality is that any product that is linked to the market movements and offers you the opportunity to earn returns will have certain risks involved. For instance, if you are someone who wants to earn returns through investing in the equity market, you have to be prepared to undertake the risks involved as well. Understanding these risks will help you plan for safeguarding your investments against them.

The types of investment risks that investors are exposed to are broadly summarized in the table below (in no particular order):

How do you handle these risks?

Recognizing risks is important, but knowing how to deal with them is even more critical. In order to mitigate these risks, be certain to understand and implement the following simple strategies:

• Become more aware: You should become more aware and you can do this by simply reading up and understanding more about the risks involved when you invest. This can give you the comfort and knowledge required to deal with them effectively. Also, fight the urge to act impulsively or emotionally and be aware of behavioral biases that can creep in and impact your decision making ability.

• Identify your own risk profile and the inherent risk in a product: Knowing yourself well can help you make the right decisions to match your own thinking. Therefore it is very important to identify your own risk profile and the inherent risk in the investment product. You should then match it to your risk profile and your goal orientation.. For example, if you are a conservative person and your risk profile indicates a low-risk tolerance, it is advisable to build a portfolio with a strong safety orientation such as government bonds, short term debt and so on. But on the other hand if you are an aggressive person and your risk profile indicates a high-risk tolerance, your portfolio can consist of equity stocks, real estate and so on.

• Understand the right risk - return balance for yourself: You should understand the right risk - return balance for yourself: Now that you know your risk profile and the risk involved in the various products, set a balance between the returns you want and right level of risk you can take while planning for your financial goals.

• Manage your investment portfolio: Diversify your investments by holding a balanced mix of asset classes and investment options within each asset class. Remain disciplined and stick to your financial plan. If you have a diversified portfolio, you will feel comfortable in the knowledge that even though there are some asset classes which perform better than others at different points, this balance will ensure that you are better protected. Also, you should ensure that you retain an asset allocation that matches your goals, with enough liquidity in the portfolio, and diversification to protect returns. If your portfolio is concentrated in a few investments, you may have to deal with poor returns when you would like to cash in your investments. You must remember to stick to your financial plan and rebalance your portfolio when needed.

• Invest for the long term: It is beneficial to stay invested for the long term. Buying and holding investments for a long duration will not only give you the best chance to maximize returns but also help reduce risk. Markets fluctuate – you may lose money as they go down, but if you stay invested for a long period of time, as and when the market recovers, you will gain. Not reacting to every single market move and being able to deal with market volatility with a sense of calmness is going to pay dividends over the long term. Remember that if you need your retirement corpus in place when you turn 60 and not when you’re 40, then your actions should reflect this availability of another 20 years in case there are market fluctuations.

• Seek professional advice: You may not have the time or the expertise to do all of this regularly, so it is highly recommended that you consider professional advice from an expert investment advisor from time to time to figure out how to manage and deal with any risks to your investments.

• Be prepared to ride and fasten your seatbelt: Lastly, fasten your seat belts and prepare yourself for the ride ahead. Yes, it may be like a roller coaster and if you are lucky, it could be quite smooth. Either way, embrace it, learn from it and enjoy it

Here is some food for thought. The same risks that can make you feel worried are also opportunities that can enable you to earn great wealth. The same situations and the examples that we shared earlier could also have been positive and helped you gain tremendously. This is because risk and returns are two sides of the same coin.
So hopefully this information has helped you realize that you don’t need to be scared of the risks related to investing, You just need to be smart, cautious and aware while planning your investment strategy and learn how to manage your investments well.

Consult an investment advisor to identify the right investment products for you.