ASSESSING RISKS IN INVESTMENT DECISIONS

[Dr. Sanjiv Agarwal]

Stock markets are once again buoyant, more so after the historic price fall in bullion a fortnight back. Investments, however, continue to be a major risk prone activity, whatsoever invested in and one therefore, needs to invest only after assessing his or her risk appetite.

While investing in bullion may carry a reasonable reward, based on track record, it is at the present juncture   a risky option. One may still opt to invest in gold, silver and the like, only if one has enough of surplus liquidity after exhausting equities, mutual funds, real estate etc. Moreover, investment decisions should also factor the current and future economic condition and prospects of the country which certainly provides direction to the investments made. Infact, it would tell how economy will travel down in future and what sectors of economy are likely to fare well or better than others. Not only this, even global scenario could matter. For example, exports in IT sector may get affected by global events and as such any major change in policy could impact and impair your investment. At times, regulatory action like EXIM policy or RBI monetary policy could also guide us in taking investments calls, though indirectly. The challenge is to read between the lines and see the signals.

If recent Reserve Bank of India’s monetary review is any indication, Indian economy is still fighting with slow down and industrial growth so much so that RBI has even lowered the growth prospects to 5.7 percent which is lower than Government estimate of 6.5 percent . Industrial growth is slowing down and inflation is still a worry. Lending rates are also not expected to come down in near future, not at least in this quarter. Even the home loan EMI’s may not get reduced despite 0.25 percent point cut in the repo rates. So investors and customers may not really benefit out of if. www.taxmanagementindia.com

It is a proven fact that mutual fund schemes do provide diversified options to choose from- sectoral as well as objectively diversified. it could also provide internal diversification  in the form of diversified equity funds- large cap, mid-cap as well as small-cap funds. Investors could also invest in index funds, tax saving plans or exchange trade funds (ETF) including gold ETFs. Most of the funds tend to provide market linked returns at a fairly competitive cost.

However, investors ought to consider their objective, risk profile and age before opting for a mutual fund scheme. A disciplined investor may also choose a systematic investment plan (SIP) for a distributed investment pattern and regulating volatility in prices. Coming to active investors with an appetite for higher risk, one can choose equities and even real estate. Higher risk with long term investment horizon may yield good returns. However, higher risk investment in short term only prove to be a speculation, not an investment. The golden rule of risk bearing investment’s  is – ‘take big risks only when you can tolerate big losses’ .Such investments offer on opportunity for higher returns (more than normal)   over a long term horizon. However, any unforeseen reverse trend or bearish market may erode the value of the investment portfolio, substantially. That’s why high risk investments are not for all classes of investors. First time investors or small investors should keep away from such investments, including chit funds or other private investments.