Gauge the Risk in Your Investments

People generally start investing to get more out of their money, thinking mostly of the upside – but they don’t always account for the risks associated with their investments. Similarly, while the internet has many resources highlighting the ‘best performing assets/schemes' etc. there are far fewer sources alerting investors to the associated risks.
Jul 2022
3 mins read

Assessing the risk of your investments is one of the most critical steps in investing. Accurate risk assessment requires sound knowledge and understanding of the asset class and the market, and the economic dynamics within which the asset operates. 

Here’s how you can master risk assessment: 

Evaluate the risk of your existing investments
List your investments to ascertain the asset mix, view your exposure pattern, and understand the amount of risk in your portfolio. For example, if you have high exposure to equity, you will need to evaluate your comfort level in case of a downturn in the market.

Downsize your portfolio
Downsizing is an integral and convenient step towards reducing the risk of the portfolio. Identify investments which basis your risk appetite and financial goals, have limited prospects and exit them in phases, within a short timeframe. If you are unsure which ones to hold and which ones to sell, check with your financial advisor.

Cut your losses
Sometimes, a formerly high-performing investment might have left its best days behind it, and might be making losses. If you see an investment which is showing no signs of recovery or revival, you should cut your losses and exit your investment. If you have already lost money, holding on might only make you lose both time and money. Don’t throw good money after bad.

Consult a professional financial advisor to determine yours.

How to optimise your investment planning by managing your risk
It is important to pursue a holistic approach to investment planning, following these seven steps:

  1. Create an emergency fund:
    Keep 6-12 months of household expenses in the bank to meet any emergencies, including temporary job loss etc., Depending on your job security and income stability, you may consider increasing this time period.

  2. Avail health cover and life cover:
    See if your employer already provides you with health and life cover. Even if health cover is provided, ascertain whether it is sufficient. Then evaluate your Term cover in conjunction with yours and your family’s financial goals. Compare plans and choose the one that offers maximum benefits at a minimal premium over a longer tenure.

  3. Ascertain your financial goals:
    This is the blueprint for your investments over the long term. Write down goals such as children’s education, vacations, house and retirement, and ascertain the corpus and the timeline for each. Remember to factor in the inflation rate while arriving at the corpus.

  4. Align existing investments with your financial goals:
    The balance of your investment portfolio should be re-aligned with your financial goals. The difference between your existing corpus and the corpus required can be bridged via systematic investment plans.

  5. Align investment allocation based on your risk profile:
    You can assess your risk appetite based on multiple factors, and design a proposed investment mix that will be conducive to your goals and investment personality.

  6. Align future investments with your investment plan:
    Remember not to repeat the mistakes of your earlier days, and work in a structured manner – every investment from here on should align with your investment plan.

  7. Monitor, review and re-align as required:
    Monitor your investments periodically. Over time, revisit your financial goals and risk assessment to see if there is a need to re-align your investment plans.

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