Irrespective of the type of investment, there is always a degree of risk involved. As a smart investor, it is important to weigh your risks against the potential rewards and decide if the chosen investment is suitable as per your risk appetite and investment needs. Risk parameters vary as per the chosen investment option. Determining the risk levels and the corresponding returns can help you create a portfolio that is more suited to your needs.
What is risk in an investment portfolio?
Risk in an investment portfolio can be defined as the possibility that the actual return from your total investment will be less than the expected return. Sometimes, it may also mean losing a part or all of your original investment, thus affecting your financial goals.
What are the different types of investment portfolio risks?^
Market risk -Also known as systematic risk, this risk affects the overall financial market. This is caused by factors such as a change in interest rates, recessions, natural disasters, political turmoil, or other such factors
Liquidity risk -This risk arises when an asset cannot be readily converted into money. This may lead to a loss as you may have to sell your high valued assets at a lower price
Concentration risk -The risk of loss because all your funds are invested in a specific investment is concentration risk. You should diversify your investments to spread the risk over different types of investments, industries, and geographies
Reinvestment risk -This is the risk of loss from reinvesting the previously invested fund at a lower interest rate than before
Inflation risk -Over time, the same amount of money will buy lesser goods and services, owing to inflation. This leads to a loss in the real value of money
How to evaluate risk before investing?
All investments inherently carry a degree of risk. It is important to understand your portfolio risk and evaluate if the risk is aligned with your financial objectives, before investing.
Your risk tolerance is the amount of uncertainty you are willing to undertake to achieve a desired level of returns. Factors like your investment goals, experience, time horizon, financial responsibilities, and monthly expenses can help you understand your risk tolerance better.
Ideally, when you are young with a reliable income, you tend to have a higher risk tolerance because you have enough time to recover from any loss. But with age, your risk tolerance reduces as your financial responsibilities increase and you have a shorter time horizon to recover your losses.
How to control or reduce your portfolio risk?
Typically, high-risk portfolios offer high returns; whereas, lower risk portfolios provide moderate or low returns. If you are a high-risk investor, you could invest more heavily in high-risk instruments such as equity. Alternatively, if you are a low or moderate risk investor, opting for safer bonds, savings plans, cash deposits, and more can be a good choice.
The fundamental rule to reduce investment risk is diversification. It is advisable to not put all your money in one instrument, instead invest in a variety of assets. You can include options like the ICICI Pru Signature ULIP in your portfolio that offers a variety of fund options and portfolio strategies to choose from while aiming for lucrative returns. The plan also offers the flexibility to shift between funds to make use of market returns. Below are some benefits of the plan:
- Four portfolio strategies and a wide range of fund options - equity, debt, and balanced
- Unlimited fund switches at no additional cost
- Option for systematic withdrawals1 during the policy tenure
- Tax benefits*
- Life cover2
The key to reducing portfolio risk is diversification. ICICI Pru Signature Plan offers flexible investment options with an added advantage of a life cover2. With this special life insurance plan, you can diversify your investment while earning better returns and keeping your loved ones financially secure.
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1 Systematic Withdrawal Plan is allowed only after the first five policy years.
2 Life Cover is the benefit payable on the death of the life assured during the policy term
* Tax benefits under the policy are subject to conditions under Sections 80C, 10(10D), 115BAC and other provisions of the Income Tax Act, 1961. Goods and Services Tax and cesses, if any, will be charged extra by redemption of units, as per applicable rates. Tax laws are subject to amendments from time to time. Please consult your tax advisor for more details
^ Different types of investment portfolio risks: https://www.getsmarteraboutmoney.ca/invest/investing-basics/understanding-risk/types-of-investment-risk/
ICICI Pru Signature (unit-linked non-participating individual life insurance plan) - UIN: 105L177V06