{"id":7764,"date":"2021-06-29T16:25:00","date_gmt":"2021-06-29T10:55:00","guid":{"rendered":"http:\/\/www.apnaplan.com\/?p=7764"},"modified":"2021-06-30T02:52:11","modified_gmt":"2021-06-29T21:22:11","slug":"investment-risks","status":"publish","type":"post","link":"https:\/\/www.apnaplan.com\/investment-risks\/","title":{"rendered":"11 Investment Risks that You Must Know Before putting Your Money"},"content":{"rendered":"\n

With popularity of Mutual Funds you must have heard\u00a0\u201cMutual fund investments are subject to market risks\u00a0Please read\u00a0the offer document carefully before investing<\/strong>“. But do only mutual fund have investment risk and other investments are risk-free?<\/p>\n\n\n\n

In fact you might not realize but what you consider as \u201cSafest\u201d like Fixed Deposit also carries some investment risk.<\/strong> This post tells you the risks that are associated with various investments and how to deal with\u00a0them. This would help you think and take better decisions.<\/p>\n\n\n\n

Investment Risk in Fixed Deposit, Bonds, and other Fixed Income Instruments<\/h2>\n\n\n\n

We start with the most popular investment idea \u2013 Fixed Deposits. Most investors consider FD as Risk Free but this is NOT true<\/strong>. Below are the risks associated with investment in Fixed Income\/Debt instruments like Fixed Deposit, Bonds, etc.<\/p>\n\n\n\n

Default or Credit Risk<\/span><\/h3>\n\n\n\n

The Risk:<\/strong> You might not get principal and interest due on time or not get back at all<\/p>\n\n\n\n

  1. Most risky investments:<\/strong>Investors who had put money in shady companies or real estate companies<\/strong> are still fighting to get their money back.<\/li>
  2. Depositing money with co-operative banks is riskier<\/strong> than other banks. More than 165 co-operative banks have been shut down in Maharashtra alone in the past 30 years.<\/li><\/ol>\n\n\n\n

    Get Highest Fixed Deposit Interest Rates<\/strong><\/strong><\/h4>

    Fixed Deposit with Banks is one of the most popular and convenient investment option. To help you choose the best, we compare the interest rates on fixed deposit across all major 48 banks in India including government, private, foreign and small financial banks<\/a> in India every month. This may prove to be quite handy for you in choose the Best Bank FD scheme<\/a>.<\/p><\/div><\/div>\n\n\n\n

    Recent Events:<\/strong><\/p>\n\n\n\n

    DHFL, Helios and Matheson Information Technology, Jaypee Infratech, Jaiprakash Associates, Valecha Engineering, Ansal Properties, Elder Pharmaceuticals, Zenith Birla, Unitech Ltd and Rasoya Proteins are some of the BIG companies which have defaulted on their fixed deposit payments.<\/p>\n\n\n\n

    How to mitigate Credit Risk?<\/strong><\/p>\n\n\n\n

    1. Always invest in fixed deposits\/ bonds of high Credit rated companies.<\/strong> Retail investors should not risk their money with companies with \u2018A\u2019 or lower ratings.<\/p>\n\n\n\n

    \"Credit
    Credit Rating & What it Means<\/strong><\/figcaption><\/figure><\/div>\n\n\n\n

    2. Government backed investments\/bonds<\/strong> like GOI bonds, PPF, NSC, SCSS, SSA etc are safest as far as credit risk is concerned.<\/p>\n\n\n\n

    3. Government backed big companies like NTPC, IOCL,<\/strong> etc are safe bets too.<\/p>\n\n\n\n

    4. Government Banks are least risky<\/strong> followed by large and small private banks. Co-operative banks are risky.\u00a0If you bank with co-operative banks do keep limited amount with them. Only deposits up to Rs 5 lakh is insured<\/a>. Though there are ways in which you can increase this insurance.<\/p>\n\n\n\n

    Interest Rate Risk<\/span><\/h3>\n\n\n\n

    The Risk:<\/strong> The bond prices fall if the interest rate rises and vice-versa.<\/p>\n\n\n\n

    Most risky investments:<\/strong> Long tenure Bonds, Debt Mutual Funds (especially funds that invest in long tenure bonds)<\/p>\n\n\n\n

    \"Bonds
    Bonds price change with Interest Rates<\/strong><\/figcaption><\/figure><\/div>\n\n\n\n

    Recent Events:<\/strong><\/p>\n\n\n\n

    Long\/Medium term debt funds suffered losses up to 2.2% in a single day on February 8, 2017 as there was no change announced in Monetary Policy by RBI that day. Everyone expected interest rate cut and so the bonds were trading at higher. As there was NO interest rate cut, the bonds prices fell leading to losses in debt funds.<\/p>\n\n\n\n

    How to mitigate Interest Rate Risk?<\/strong><\/p>\n\n\n\n

    1. The longer the maturity duration of the bond more prone it is to the price fluctuations on interest change. So invest in bonds or mutual funds with short maturity.\u00a0<\/strong>Usually Liquid, Ultra Short Term & Short Term Mutual funds invest in bonds with low maturity (though there are exceptions).\u00a0Long term GILT mutual funds are most risky as the bond duration could be 20 to 30 years.<\/li>
    2. There is NO impact if you plan to hold your bonds till maturity<\/strong>.<\/li><\/ol>\n\n\n\n

      Learn All about NCDs<\/strong><\/h4>

      NCDs or non-convertible debentures or more popularly known as Bonds are a bit complex investment products. You must understand the product, risk involved, the taxation on interest received and when you sale it. We have done a separate post regarding this titled – Know all about NCDs<\/a>.<\/p>

      Also you can keep track of upcoming NCD issues<\/strong> here<\/a>.<\/p><\/div><\/div>\n\n\n\n

      Reinvestment Risk<\/span><\/h3>\n\n\n\n

      The Risk:<\/strong> The proceeds from an investment would have to be reinvested at a lower rate than the original investment<\/p>\n\n\n\n

      Most risky investments:<\/strong> Fixed Deposits, Bonds with Call option (which means the company has an option to buyback bonds before maturity)<\/p>\n\n\n\n

      Recent Events:<\/strong><\/p>\n\n\n\n

      The interest rates are cyclical<\/strong> \u2013 which means it goes up and comes down. The problem is it\u2019s very difficult to predict even by experts! Right now we are seeing Bank FD interest rate in the range of 4% to 7%. In 2011 the interest rates for 5 year FD was in the range of 9% to 10%. These FDs would mature now which have to be invested in FDs with interest rates.<\/p>\n\n\n\n

      How to mitigate Reinvestment Risk?<\/strong><\/p>\n\n\n\n

      1. Lock-in for long term when the interest rate is relatively higher.<\/strong> If you have money you can go for Fixed Deposit else open a recurring deposit.<\/li>
      2. Do NOT invest in bonds with Call option.<\/strong> They usually offer higher interest to compensate for call option.<\/li><\/ol>\n\n\n\n
        \"Investment
        Investment Risks and How to deal with them?<\/strong><\/figcaption><\/figure><\/div>\n\n\n\n

        Investment Risk in Equity<\/h2>\n\n\n\n

        Following are the investment risks if you have put money in stocks or equity related instruments like equity mutual fund & ULIPs. You would also understand what \u201cMutual fund investments are subject to market risks\u00a0Please read\u00a0the offer document carefully before investing<\/strong>” means.<\/p>\n\n\n\n

        No Fixed Returns<\/span><\/h3>\n\n\n\n

        The Risk:<\/strong> the return cannot be predicted<\/p>\n\n\n\n

        Most risky investments:<\/strong> Stocks, Equity dominant Mutual Funds<\/p>\n\n\n\n

        How to mitigate?<\/strong><\/p>\n\n\n\n

        1. Most illustrations available predict equity returns from 10% to 20% based on history. The time period selected depends on their convenience. The first thing you should know you CANNOT predict returns in stocks.<\/strong><\/p>\n\n\n\n

        2. So the next best thing is to buy when the markets are lower priced.<\/strong> There are various metrics which tell that markets are trading at lower levels. The problem is they are NOT 100% accurate and there is NO guarantee that history would be repeated. But for layman it\u2019s good to buy when PE of markets are lower than historical averages.<\/p>\n\n\n\n

        \"Buy
        Buy at lower PE<\/strong><\/figcaption><\/figure><\/div>\n\n\n\n

        3. If investing directly in stocks, stick to strong well managed companies.<\/strong> (However remember that No one knew about fraud happening in Satyam \u2013 one of the biggest IT companies of its time)<\/p>\n\n\n\n

        4. Invest through equity mutual funds or Index<\/strong>.<\/p>\n\n\n\n

        5. DO NOT trust experts or schemes which promise more than 20% returns!<\/strong> It\u2019s definitely fraud\u2026<\/p>\n\n\n\n

        SIP Vs. Lumpsum \u2013 Which is the Best way to Invest in Mutual Fund?<\/strong><\/h4>

        There is always a debate on what is the right way to invest in Mutual Funds – SIP or lumpsum? We give you examples and situations on which of the investment method outperforms. Do read SIP Vs. Lumpsum \u2013 Which is the Best way to Invest in Mutual Fund?<\/a><\/p>

        Additionally Read about common myths about SIP investment in Mutual Funds<\/a><\/p><\/div><\/div>\n\n\n\n

        Volatility Risk<\/span><\/h3>\n\n\n\n

        The Risk:<\/strong> the price fluctuates widely<\/p>\n\n\n\n

        Most risky investments:<\/strong> Stocks, Equity dominant Mutual Funds<\/p>\n\n\n\n

        How to mitigate?<\/strong><\/p>\n\n\n\n

        1. On certain days some stocks can fluctuate more than 20% but there are ways to overcome this. The volatility decreases as the investment tenure increases. So invest for long term.<\/strong><\/p>\n\n\n\n

        \"Deviation
        Deviation reduces as investment tenure goes up<\/strong><\/figcaption><\/figure><\/div>\n\n\n\n

        2. Diversify your investment across various stocks.<\/strong> If you compare stock of one company fluctuates more than index.<\/p>\n\n\n\n

        3. Invest in Equity Mutual Funds or indexes through Systematic Investment Plan<\/strong> (SIP)<\/p>\n\n\n\n

        Investment Risk in Real Estate<\/h2>\n\n\n\n

        Following are the risks if you have invested in Real Estate<\/p>\n\n\n\n

        Default Risk<\/span><\/h3>\n\n\n\n

        The Risk:<\/strong> builder fails to deliver on time or does not deliver at all<\/p>\n\n\n\n

        Most risky investments:<\/strong> Under construction properties<\/p>\n\n\n\n

        Recent Events:<\/strong><\/p>\n\n\n\n

        Most properties in NOIDA, Gurgaon are running with delays of 2 to 5 years. Unitech one of the biggest builders (until few years back) has lot of under construction properties where it cannot deliver due to lack of funds.<\/p>\n\n\n\n

        How to mitigate?<\/strong><\/p>\n\n\n\n

        1. Do NOT invest in under construction property<\/strong>.<\/li>
        2. Penalty clause in agreement are helpful but they are NOT implemented in spirit by real estate companies. You cannot expect company pay penalty if they do not have funds to complete the project.<\/li><\/ol>\n\n\n\n

          Quality Risk<\/span><\/h3>\n\n\n\n

          The Risk:<\/strong> the built quality is of low quality due to cheap material or faulty workmanship.<\/p>\n\n\n\n

          Most risky investments:<\/strong> Under construction properties<\/p>\n\n\n\n

          Recent Events:<\/strong> Most New buildings have this issue<\/p>\n\n\n\n

          How to mitigate?<\/strong><\/p>\n\n\n\n

          1. Do NOT invest in under construction property<\/strong><\/li>
          2. Stick to reputed builders<\/strong> (this might not always help but then you have NO other option)<\/li><\/ol>\n\n\n\n

            Are you Paying Too much Taxes? Download your free presentation<\/strong><\/h4>

            Are you worried that you are paying too much in income tax? Are you aware of all the changes in the tax laws? Where should you invest to save taxes? Do you know all tax sections that you can use to save your tax. Download a concise 43 page presentation free to answer all the above questions and save your taxes – legally.<\/a><\/p><\/div><\/div>\n\n\n\n

            Investment Risk in Gold<\/h2>\n\n\n\n

            Following are the investment risks if you have put money in Gold or Gold related instruments like Sovereign Gold Bonds<\/a>, Gold ETFs<\/p>\n\n\n\n

            Quality Risk<\/span><\/h3>\n\n\n\n

            The Risk:<\/strong> The gold has other metals mixed in it and is NOT of stated purity<\/p>\n\n\n\n

            Most risky investments:<\/strong> Physical Gold<\/p>\n\n\n\n

            How to mitigate?<\/strong><\/p>\n\n\n\n

            1. If buying gold for investment invest in Sovereign Gold Bonds or ETF<\/strong><\/li>
            2. If buying jewelry go with hallmarked jewelry only<\/strong><\/li><\/ol>\n\n\n\n
              \"Gold
              Gold Hallmark<\/strong><\/figcaption><\/figure><\/div>\n\n\n\n

              Should you Invest in Gold?<\/strong><\/h4>

              We looked at more than 55 years history of gold to see if its a good idea to invest in Gold. We concluded that its more volatile than perceived but investing in long term may provide you with more stable returns. You can look at the complete analysis and our conclusion here – Looking at Gold Price History in India \u2013 Should you Invest in Gold?<\/a><\/p><\/div><\/div>\n\n\n\n

              Price Risk<\/span><\/h3>\n\n\n\n

              The Risk:<\/strong> Prices fall after you buy<\/p>\n\n\n\n

              Most risky investments:<\/strong> All kind of investments in Gold<\/p>\n\n\n\n

              How to mitigate?<\/strong><\/p>\n\n\n\n