Various factors have an interrelationship behind the end result of any activity. This is also true in the case of equity investment. While the return from the equity asset class has the potential to beat the returns of other asset classes over the long term, there are various risk factors at play. The risk-reward ratio is higher in case of equity-oriented investments such as equity-mutual funds and direct stocks. This means, for higher returns, there is also an element of high risk.
Risk in equity can be caused by various factors and is seen in the volatility that comes with it. “The equity market is very volatile due to the many risks that are associated with it such as market risk, inflation risk, currency risk, economic condition risk, specific sector and stock risk and so on. Therefore, it is imperative that one is fully aware of them and does not have unreasonable short-term expectations and is also willing to accept short-term volatility in the portfolio. RIA), and CEO, Fuji Initiatives, a financial planning company.
However, over a long horizon, the volatility reflected in the equity value or NAV has been tamed. This means and it has also been established through various studies that the momentum in equity values drift upward for a longer period. This can be the silver lining in equity investment and long-term investors can find solitude in this approach.
The stock market, as has been seen before, may even fall by more than 1000 points in a single day, resulting in a decrease of over 5-10 per cent of the NAV. From global to internal factors, from economic to non-economic factors, the sea can be seen at short intervals in the market. However, in the long run, corporate earnings are a strong reason for the stock to grow for the long term.
Therefore, invest only through equity mutual funds when your goals are at least seven to ten years away. Said that, while passing goals, one should avoid risk and move from equity to debt funds, which are less volatile in nature.
“Equity funds are subject to market risk. One should keep in mind that in the short term this means that perhaps you know in a short period of 1 to 5 years, their wealth may be reduced by 50%. Therefore, they should keep in mind that if we invest for a longer period of time then we should give priority to equity funds. But if it is small, they should never gamble nor risk it. Equities have been around for a long time.
Debt funds, representing the debt asset class, also have their own risks. “Debt mutual funds have relatively lower risk than equity mutual funds, but do so. As an asset class, they have two basic risks – credit risk and interest rate risk. It is possible that a particular fund incorporates these two to achieve higher returns, or it may be that a fund tries to reduce both by accepting lower returns. Colonel Govilla (retired) says that investors will have to do their research to create such a balance.
To be more secure and to take care of the least debt risk, funds investing in government securities can be ideal. “In credit risk, the fund manager may invest in low-credit rated securities that are more likely to default. In interest rate risk, bond prices may fall as interest rates rise. You should always go for secured debt funds backed by government securities or A + securities, ”informs Chawla.
Once you are aware of the risks in equity and debt funds, you will be in a better position to use them to create wealth in the long term. Both have an important role to play in leading the way to meet their long-term goals. There is a risk behind returns, they know for a smooth investment process.
He said that the government has taken several steps to prevent such incidents.