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Step Up Risks for Investors - Where Are You
It is a well known fact that every type of investment whether it is stock, commodities, real estate, fixed deposits, recurring deposits, mutual funds, shares, debentures, insurance, etc. carry some risks. A smart investor is one who understands these investment risks and manages his personal finances and remains satisfied with the returns he has gained. Below are some step-up risks for investments, which you need to understand before you fall in the debt trap.
Step Up Risk 1
Buy a fixed deposit of a fixed tenure (exposes investor to credit risk), but there is some return in the form of interest.
Step Up Risk 2
Buy a fixed income security tradable in debt market (exposed to credit risk, interest rate risk, settlement risk). But this should offer better return than a fixed deposit of the same tenure.
Step Up Risk 3
Deploy a part of your net worth (may be 45% to 55%) and buy a professionally managed equity index mutual fund. Great!
Step Up Risk 4
Deploy 90% of investor's net worth into professionally managed equity fund. There's liquidity risk to staring at the face of the investor’s financial position but then, manageable because the asset he holds itself is liquid.
Step Up Risk 5
Run own equity portfolio with 100% net worth, invested into micro-cap illiquid stocks. (Huh?)
Step Up Risk 6
Deploy 500% of investor's net worth into stock futures trading (gosh - you see the leverage?)
Step Up Risk 7
Deploy 10000% of investor’s net worth into illiquid real estate property, arguing that prices of real estate are destined to go up forever. (Perfect road laid down to meet destiny or bankruptcy, mostly the latter.)
There could be multiple sub-steps in between each of the two distinct steps. The investors should cut themselves off at a point where it makes sense and be content with the returns they get. Vying for too much at the cost of anything is great, but achieving that perhaps, is the feat only those heroes in Movies somehow always successfully accomplish. But well, that’s another story.
P.S.: Putting money in a current account (or in a vault) is absolutely safe but there is zero return.