What is Investment Risk?

Aug 17, 2022

How to determine investment Risk?

Due to un ty and unpredictability of the market it is impossible to say that if one investment is clearly the safest. The safety of an investment depends upon the returns predicted and given. Some would say a fixed return investment can be considered as the safest investment one can do, whereas it sure beats the unpredictability of the market and is bound for returns, the ROI percentage itself is so low on investment of this kind that it fails to even beat inflation. How can an investment be safe if you’re losing your money on it? 

In reality, All investments carry some kind of risk factor with it. Now, it depends on the needs and risk appetite of the investor which’ll determine the safeness of an investment. 

The risk and reward concept

You might be familiar with the concept of risk and reward, that states, higher risk involved with a particular investment, higher the possible return. But some investors don’t understand how to determine the risk and match it with their ability to bear possible losses. To know the appropriate risk levelr on your investment portfolio is what helps an investor stay on the safe side. 

Risk and reward is a general trade off fundamentals on nearly everything which can generate return. In all kinds of investments which involve money, involve risk, however big or small, that it might not get your money back or the chance of that investment to fail. For bearing that risk, you hope for a return that could compensate for the potential losses. In conclusion, the higher the risk factor the more you should receive on holding the investment, and the lower the risk, the less you should expect, on average.

We can create a list with the different types of investments and their associated risk/reward profiles. 

Low risk

  • Conservative
  • Moderately conservative
  • Moderately aggressive
  • Aggressive
  • Very aggressive

High risk

Of course, this list has no scientific basis, but ly can be used as a guideline for you to determine your Investment approach. The list contains approaches listed from low level to high level of risk. You should determine your strategy by your needs. In the start of this chart are investments that have higher risks but offer investors a high potential returns. In the below portion investments which are much safer, but a lower potential for high returns or any volatility.

risk preference

With so many different kinds of investments, how does an investor choose what risk they have the appetite for? Every person is different and has different needs, and it’s what makes it difficult to create a safe steadfast model applicable to everyone, regardless, here are two important things you should consider when deciding how much risk to take: 

Time Horizon

Before you decide to make an investment with your capital you ought to take into account what time length or tenure you’re seeking to preserve your cash invested. For instance, if you’ve invested Rs10 Lakh and also you’ve planned to shop for a brand new house in the subsequent year and also you want cash for its down payment, making an investment in the cash in high volatile shares isn’t always the quality strategy. The riskier an funding is, the more its volatility or rate fluctuations. So in case your time horizon is incredibly short, you will be pressured to promote your securities at an enormous loss. With an extended time horizon, buyers have greater time to recoup any viable losses and are consequently theoretically greater tolerant of better risks. For example, if that Rs10 Lakh is supposed for a lakeside vacation residence which you are making plans to shop for in 10 years, you could make investments the cash into riskier shares. Why? Because there may be greater time to be had to get better any losses and much less probability of being pressured to promote out of the placement too early.

Bankroll

Determining the quantity of cash you could stand to lose is any other essential aspect in identifying your hazard tolerance. This may not be the maximum positive technique of making an investment; however, it’s far the maximum realistic. By making an investment most effective cash that you could have enough money to lose or have enough money to have tied up for a few duration of time, you might not be forced to promote off any investments due to panic or liquidity issues. The extra money you have, the greater hazard you’re capable of taking. Compare, for instance, someone who has a net worth of rs50 lakh to any other individual who has a net worth of 1cr. If each invests rs20 Lakh in into securities, the individual with the less net worth can be at greater risk than the individual with the better net worth. 

Then What Is the Safest Investment?

Government bonds issued are considered one of the safest investments. In fact, they are sometimes referred to as risk-free and a government has the option (in theory) of printing more money in order to cover its debts. Therefore, it’s considered among the safest investments around but often provides the lowest returns because of this fact.

Whereas, P2P lending platforms are a relatively new concept in India which is gaining phenomenal popularity in recent years. P2P platform brings borrowers directly to lenders, cutting out the financial institutions as middle men. This allows p2p platforms to give higher interest rates to lenders on their returns compared to bank savings, with relatively lower risk than the share market. LenDenClub can be your 1st choice in starting to invest on p2p platforms.

The Bottom Line

Not all Individuals are created equal nor are investors. While some can only afford to take less risk, other investors prefer.

 you can start with the best option on the market by joining the trend of investing in a P2P platform. LenDenClub provides one of the best opportunities for you.

Register Now to start investing with LenDenClub!

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