|
Risk and return both are an integral part of an investment. It is the major factor deciding the selection of the investment instrument as well as potential return.
|
The first principle is that risk and return are directly related. The greater the risk that an investment may lose money, the greater its potential for providing a substantial return. By the same calculation, the smaller the risk an investment poses, the smaller the potential return it will provide.
|
|
For example, a startup business could become bankrupt, or it could become a full fledge company. If you invest in the share of this company, you could lose everything or make a fortune. In contrast, a blue chip company is less likely to go bankrupt, but you're also less likely to get rich by buying stock in a company with lakhs of shareholders.
|
The second principle is that if you can get a better-than-average return on an investment with less risk, you may be willing to sacrifice potentially greater return to avoid greater risk. That's sometimes the case when interest rates go up. Investors pull their money out of shares, which are more risky, and put it in bonds, which are less risky, because they're not giving up much in the way of potential return and they're gaining more safety.
|
|
The third principle is that you can balance risk and return in your overall portfolio by making investments along the line of risk, from the most to the least. the portfolio must be diversified in this way means that some of your investments have the potential to provide strong returns while others ensure that part of your principal is secure. |
|
|
