Take a step to Risk (Risk and Safety Margin)

Take a step to Risk (Risk and Safety  Margin)

For many people, Risk refers to like eating a ‘Rusk’.  But, it is not a eatable item. Then, how many of us are like to take the ‘Risk’ ?

Risk – Exposure to Danger or Hazard

In Financial(Investment) terms, Risk is a deviation between the actual and the expected returns.

Risk has two faces, as it have Positive and Negative.

Without any risk, the investment of money can gives the return of ‘Null’ or a little bit like positive. If we dare to act, then we get better Profits (Positive) and Losses(Negative) in many cases J  This is the case for so many of us, not willing to take risk or take risk without aware.

Is it good, for not taking Risk ?

Is really, Risk less investments are protecting our wealth /Future Daily expenses ?

Absolutely not !

Then, how we at Risk ?

• ·         Getting down in the river without knowing how to swim or Not aware about the depth of the river even  Swimming.
• ·         Riding rude in National Highways or not knowing how to tackle the opposite Road Vehicles even following Road Rules.
• ·         Taking Risks at Play ground, School Days, Love, in your office, Smoking, Using Alcohol – Like we are taking risk regularly.

We still take risk, but we forget the effect of risk J

What is the Effect of Investment Risk ?

On Investing terms, we mostly willing to protect our Capital and so we looking for the Safe Investments like Bank Deposits, Postal Savings, Government Bonds(Gilt) /Securities(G-Secs). But we have to understand, we just getting the Low return on our investments because of these Safe Investments.

Are you think these Safe Investments are protecting your wealth ?

Not at all, even it sucks your future expenses and dreams. Because of the effect of investment risk.

Risk Types:

·        

•       Inflation Risk
•           Liquidity Risk
•           Business Risk
•          Interest Rate Risk
•           Market Risk

Inflation Risk:

We Can’t avoid these type of Risk (Inflation). A general increase in prices and falling in the purchase value of money.  So, we lose the Purchasing power due to inflation. Today’s  value of Rs. 100/- will not be  the same for next year and if the Inflation goes 8 % then the value of Rs. 100/- today will be the Rs. 92/- for the next year.  Herenow, if you have the low return on your investments, even safe deposits but you lose the purchasing value. Your dreams lose too.

Liquidity Risk:

We could have anyone of assets like Physical or Financial Assets. Physical Assets refer such as Real Estate, Gold, Factory and the Financial Assets like Bank Deposits, Bonds, Stocks,etc. Every assets have a different criteria for the Return on Investments. But the liquidity is the matter in force, when we need in to cash. We cannot always redeem immediate cash on our Real Estate Property and Some Deposits have a maturity period to encash. Here now, we need the liquidity for our immediate expenses.

Business Risk:

Risk in the Operations of a company or a sector. So, it is known as operating risk. This risk is caused by some factors that affect the business of a company, like Raw material Cost, Labour Costs, Sales and Distribution costs, Marketing strategy with the Competitive products or companies. So, Holding a diversification on our portfolio, we can protect our business risk.

Interest Rate Risk:

Interest Rate risk refers to the risk that the bond prices will fall in response to rising interest rates and vice-versa.

The relationship between the rates and bond prices look like:

If the interest rates fall then bond prices will go up, if interest rate rise then the bond prices will go down.

Market Risk:

The risk of the loss of value in an investment due to the price movements in the market.  What we have already seen like, if the interest rates rise, then the value of existing bonds will fall. Similiarly, an appreciation in the currency reduces the earnings for the Export based business and leads to a currency risk.  Market risk affects the investments where the transactions happen at current prices such as Equity,bonds, gold, Real Estate,etc. Small savings schemes have no market risk, but they do not gain in value.

                                                          (Source: gametheoryacademy.org)

Risk  Tolerance:

Risk Tolerance tells about our Risk Capacity and the attitude of risk.

Risk Capacity refers the ability to take risk and the Risk Attitude is the willingness to take risk. So, we can plan accordingly with this Risk Tolerance.

Margin of Safety:

Margin of Safety is the difference between the intrinsic value and  it market price. In other words, the difference between actual sales and break even sales.

The Margin of safety is also protect our investment from the unknown risk.

Like protecting,

• ·         Insurance against any loss
• ·         Enough cash to survive or  Save extra cash for the surprise expenses
• ·         Prevention is better than cure.

So, Take risk a Boss !

Risk  comes from not knowing what you are doing – Warren Buffet