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If you’ve so much as dipped a toe into the world of investing, you have surely heard about these two key investment terms – risk and reward. From hearing about ‘market risk’ on TV ads to seeing the words ‘risk and returns’ across investment apps – risk and reward directly influence an investor’s overall gains.
Whether you are using an investment app, or are investing using traditional methods, understanding these two terms is extremely important if you want to be able to make sound financial decisions.
So, let’s not waste any time – and let’s dive right in!
Risk
Risk refers to the possibility of losing some (or in extremely unfortunate cases – all) of the invested money due to various uncontrollable factors such as market volatility (the up and down!), economic conditions, company stocks, or regulatory changes. So when you hear of a high-risk investment, you are basically hearing of an investment that can potentially cost a severe dent in your wallet; while low-risk investments are typically less susceptible to market changes.
Reward
Returns. Gains. Profits. Rewards represent the potential gain or profit that an investor can earn from their investment. This is also called the Return On Investment or ROI. The ROI is – simply put – the money you are hoping to make off of your investments, in addition to the principal amount you have invested. High-reward investments mean just that – they have the potential to bring in big bucks, and low-return investments are just the opposite.
Now that we have clarified the basics about risk and reward, let’s see how risk and reward play out with respect to each other, in various scenarios – and what options are available for each scenario –
Scenario – Low-Risk, Low-Reward – In this scenario, an investor chooses a relatively safe, low-risk investment option (and there’s no shame in that!) While such an investment would be considered safer because it offers a guaranteed return, the ROI itself would be relatively low compared to more robust investment options. Opting for low-risk, low-reward investments guarantees the investor relatively stable albeit modest growth on their investment.
Fixed Deposits, Recurring Deposits, Public Provident Fund are some examples of low risk + low reward investment options that you can check out on your investment app.
Scenario – High-Risk, High-Reward – Here, an investor will take on a higher level of risk by investing in stocks of emerging companies or sectors which are showing significant growth potential. Yes, investors will experience a greater chance of losing money, but successful investments in such options can also generate substantial returns (Ka-Ching!). It is, however, important to note that thorough research and analysis are crucial in such cases to mitigate risk – be sure to have some guidance through your investment app!
What to look for on your investment app for high-risk + high-reward? Stocks are a good example of an investment option for those with a high-risk appetite.
Scenario – Moderate-Risk, Moderate-Reward – Many investors prefer a balanced approach – and honestly, that’s a good approach to have. It just makes sense to aim for a reasonable level of risk and expect a reasonable reward in turn. Moderate-risk investments are those that have a certain level of risk – yes – but if that risk pays off, investors can capitalize on the potential for relatively stable returns over the long term.
What to look for on your investment app? Diversified mutual funds are a good example of a mid-risk investment option.
Scenario – No-Risk, No-Reward – In some cases, individuals may choose to avoid risk entirely by keeping their money in low-interest savings accounts or simply not using any investment app to regularly invest at all (something we ardently advocate against!). While this strategy eliminates the possibility of financial loss (read: risk), it also means missing out on potential returns (read: rewards) that could be earned through disciplined smart investing.
What to look for on your investment app? The bare minimum will do!
It is extremely important to remember that investment risks and rewards are interconnected terms in the investment market.
As an investor – it is your responsibility to assess your risk tolerance. As you invest more and more, and diversify your risk profile, you will find that it is important you take charge of your financial goals.
We also recommend determining a timeline within which you aim to strike the necessary balance between risk and reward, while also making sure your investment decisions align with your individual – personal, professional, and financial – goals. If you and your investment app are both unable to identify an investment option best suited to you, seek out help, and speak to a financial or investment advisor before you make any decisions involving your hard-earned money.
Most investment apps in India will help you identify the various risk levels associated with various investment options. It is up to you – yes you! – to do your due diligence and pick the option that is best suited for your financial portfolio.
