Understanding Market Risk

 

Understanding Market Risk

Individual finance is everything to do with managing your money, saving and investing. We are sharing this articles where we will discuss Market risks and useful personal finance concepts which everyone should know and learn before investing in Mutual fund or in Equity. For financial advice visit best financial advisor in Lucknow.

“RISK”, it is a fearful word especially in financial sector. The word itself creates a sense of fear in mind. Everyone wants to avoid risk, but unfortunately we cannot. Risk is everywhere in every field. We cannot avoid risk. What we can do is we should understand the risk and they way to deal with. We should not get scared from Risk; one should learn the ways to manage it. Being cautious and taking necessary steps to manage risk is better than living in avoidance behaviour. Let’s discuss what type of risk a person usually fears from in financial sector:-

1.      Inflation Risk:

All investment products carry risk; even fixed returns products also carry risk. They fear from the risk of getting negative real return.

Real Return = Nominal return – Inflation

In real world the inflation is much 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 the increase in lifestyle expenses and constantly decreasing interest rates on investment, the fixed return products hardly give any real return after adjusting effect of inflation.

 

2.      Market Risk:

Market risk means 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. The probability of Sensex or Nifty going down is more in 1 year as compared to 5 years. And it is lower in 10 years compared to 5 years.

 

3.      Managing Risk:

To manage risk in your portfolio you need to adequately diversify you investments in mutual fund, equity and debt. If you are planning for short term investment than 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 its 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.

We the best financial advisor in Lucknow is there to help you manage your wealth and make you aware of market risk .