Investment risk and returns are often correlated. You might have heard this umpteen times. Higher the returns on offer, higher the risk. Some investments are riskier than others. Some investments are risk-free (or considered risk free – nothing may be completely risk free).
However, in pursuit of returns, we often overlook the risk. Little bit more awareness about risk can help set expectations right!
Here are some ways in which your investment scan be susceptible to risk. Some of them are quite obvious. Some not so obvious.
This is just a partial list of investment risk. There may be many more risks one may not at all be aware of!
- Equities/ equity mutual funds – The equities you own may under perform. This can be due to issue in company, industry, economy or just because you bought it too expensive. Economy may falter due to N number of reasons. Confidence in economy or select companies may fall. All these can lead to loss in equities. In some cases permanent loss of capital. Suzlon, Gitanjali Gems, Reliance Communications etc. are case in the point.
- Real Estate – Real estate always appreciates – is a very good sales pitch. It may or may not be true. Sometimes real estate may appreciate. Sometimes they may remain stagnant (or fall in value). Then there is risk of liquidity – you need to be able to find willing buyers if you plan to sell it. Worse, sometimes the property may be disputed or stuck – and you may not actually be able to set foot on your purchase for a long time!
- Fixed deposits – Fixed deposits seem to give assured returns (though potentially less than many other instruments). But what if the bank goes bust? Your deposits are not insured beyond Rs. 1 Lac. (Freefincal has good article on it!)
- Debt mutual funds – Debt mutual funds invest in different debt based securities – corporate bonds, treasury bills, bank deposits etc. All of them carry some risk of default. DHFL & ILFS are recent examples. Even government can default, though likelihood of this may be very less. Banks may default, though lot of them may be considered too big to fail. Apart from this, debt funds also carry a interest rate risk which arise due to fluctuations in interest rates.
- PPF or other government backed deposit schemes – While many of these schemes come with a sovereign guarantee, and considered risk free – it may not always be so. Even thought the likelihood may be extremely low, what if government defaults?
- Gold/ Silver – Gold/ silver prices can remain stagnant for a long period of time (as recent history shows). There is risk in holding physical gold or silver too – especially the risk of losing it or it getting stolen.
- Hoarding cash – Cash you hold loses value for the duration you hold it – due to inflation and interest rate you don’t earn. There is also risk of theft/ losing the case. And there can be events like demonetization, which Indians witnessed in not too distant past!
Some risks are small. Some are big. Risk can come in all shapes and sizes – some known, some unknown. One may not be aware of all investment risks (exhaustive list of such risks may not be truly exhaustive!). But it is good to understand some of these risks and take informed decisions!
Meanwhile, if you are interested in reading more about risk, Nicholas Taleb’s books can be good starting point!