Assess investment risks properly before investing

Investments always entail some amount of risk. No matter how much or where you invest, your result will be subject to some risk factors. The risk and return of your investments depend on the product or asset that you have invested in. Risks are higher in equities and commodities than in debt instruments. However, the potential returns are also higher in risky instruments. You can never expect risk free investments because every asset changes in value. If the price falls, you will make a loss, marginal or huge. This risk is always unavoidable.

Investing in banks

There are many investment options that a bank can offer you. When you invest in a bank, you can actually expect the safest returns. The truth is that banks generally offer you relatively risk free investments because they face all the risk factors themselves. A bank utilizes your investment to give out loans. If the borrowers fail to repay the loans, it is the bank that faces the problems. Some parts of your investments are reinvested in government bonds by banks. This allows them to secure some part of your money. These low risk factors work for you but do not get you high returns.

Investing in stocks 

Investing in a company is more likely to bring you good returns. If you buy stocks of a company you are actually accepting a good amount of risk. Even a big reputed company can collapse any day without a warning. We saw that with the collapse of renowned financial services firm Lehman Brothers in 2008. Market situations keep changing and so do the value of the stocks. Investing in a big company’s stock will get you good returns but can never guarantee you total safety.  

Investing in mutual funds 

The risk and return factors, of your investments in a mutual fund, depend entirely on the fund’s strategies. Mutual fund managers generally diversify your investments in a way that can provide you standard returns with some stability. They reinvest your money according to your investment goals. If you want high returns, they will invest in risky products. If you choose safety over high returns, they will invest in low risk products which give lesser returns. 

Final word

As you can see, the more return you expect the more risk you have to accept. Without taking risks you will not get good returns. If you have extra money for investments, you can always opt for instruments with high risk risk as they have a good chance at getting better returns.

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