Risk means different things to different people in Investments.
Why most people don't want to invest in market based products like Equity Mutual Funds or Stocks?One reason might be due to advertisement condition “Mutual Fund investments are subject to market risks, read the offer document carefully before investing”
But unknowingly they investment in unit linked insurance plan(ULIP) which is also a market based product..We will discuss about ULIP story in another series.
Coming back to few types of investment risks we face everyday
1.Market risk - it is applicable for products based on stock market. It means investment returns are impacted by market movements.It is visible day to day basis..Right?
2.Reinvestment Risk- This happens when you are trying to renew your existing FD after maturity and seeing the new rates are less comparing to existing one, which most of the senior citizen's today facing during reducing FD rates compared to 10,5,3,2 years before.
3.Inflation risk - Low returns below inflation (assuming 6%) - Some of our investments like insurance policies giving below 5% returns ,aware of it but not sure what to do and keep pumping money YoY. Infact today someone don't have meaning equity allocation atleast 25% of your overall portfolio, is sure taking bigger risk of running out of money in coming decades. People who are planning for retirement in next 5-15 years,watch out.
4.Liquidity Risk - This is how quickly we can redeem/withdraw and get the money? As you are aware, most of indian's asset are in real estate(plots/house) above 90% . Think today how quickly you can sell and realize money if required..minimum 3-6 months?
Ok. What is the take away? Market linked products like equity mutual funds High liquidity(can redeem and realize money in 3 business day) ,Less Inflation risk ( market linked products only gives inflation beating returns in long term 7+ years) but we need to accept & digest market volatility in short term( 3-5 years).