Personal finance is everything to do with managing
your money and Saving and investing. We are sharing series of articles where we
shall discuss 9 useful personal finance concepts which everyone should know and
learn.
In this first part we shall understand Risk.
Risk, word itself creates a sense of fear in mind.
We all want to avoid risk, but unfortunately we cannot. Risk is everywhere. We
cannot avoid it and that’s why we must understand the risk and learn the ways
to manage it. Being cautious and taking necessary steps to manage risk is
better than living in avoidance behaviour.
Inflation Risk:
All investment products carry risk, even Fixed
return products carry risk. Risk of getting negative real return.
Real Return = Nominal return – Inflation
In real world the inflation is much more higher
than the data published by govt agencies. In personal finance, the definition
of inflation should be, a rate at which your expenses are growing yearly due to
price rise and change in life style. With increase in lifestyle expenses and
constantly decreasing interest rates, fixed return products hardly can give any
real return after adjusting effect of inflation.
Market Risk:
Definition of market risk is ‘Risk of losing
money due to market correction or due to falling prices of security bought in
portfolio.”
In case of equity as an asset class market risk is
less in longer term compared to short period.Probability of Sensex or Nifty
going down is more in 1 year compared to 5 years. And it is lower in 10 years
compared to 5 years.
Managing Risk:
To manage risk in your portfolio you need to
adequately diversify you investments in equity and debt.
Your short term investments should be more towards
fixed income category as the risk of inflation will not harm the value of
portfolio much in short term. The risk of inflation is much higher in long term
as it’s compounding effect can erode the purchasing power of your money
considerably in long term.
Your long term investment should be more towards
equity as the market risk is lesser in long term compared to short term. In
long term equity can give you much better return compared to debt and save your
portfolio from inflation risk.
Remember, He who is not courageous enough to
take risks will accomplish nothing in life.
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