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Have Money? Risk is Inevitable! [Part 4 - Market Risk]

The moment you have money...the risk begins. Inflation will start eroding its value day-by-day, year-by-year, decade-by-decade. In fact, it would wrong to use the word ‘risk’ here. Risk is something which may or may not happen. But inflation is a near certainty.

To beat inflation, earn some returns and make your money grow you have to invest it somewhere. When you so do, you are exposed to different kinds of risks depending on the product you choose.

Market risk
When the value of the investment varies with the market conditions we have market risk. Shares is the best example of a financial instrument which is prone to market risk.

What is an equity share? It is a share in some business. As such it is quite logical that if a business does well, its’ share will also do well; and if some business fails, its’ share too will lose money. As such, if you have more successful businesses in your portfolio. Then, despite a few failed businesses, in totality you will make money.

If you do not have the time, expertise and money to build a good portfolio, you should take advantage of the professional expertise and diversification of a mutual fund to reduce market risk.

Another risk inherent to equity is…volatility. The business prospects do not change minute to minute. But share prices do change minute to minute. And moreover this change can, many times, be quite sharp and swift. The reasons could be many such as change in forex inflows/outflows, interest rate movements, international developments, elections, changes in the tax laws and more.

Volatility risk can be mitigated by doing what in common parlance is termed as the Systematic Investment Planning (SIP).

One more strategy to mitigate market risk is Rebalancing.

(Note: More often than not people have lost money in equity due to wrong investment style. They invested based on tips without understanding underlying businesses; chased fancy stocks; bought when the markets were booming; sold when the markets were falling; wanted to double the money in quick time; used borrowed money to invest in equities; invested for short term; etc; etc.)

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