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.
Default Risk
Many of us would have been in a situation where the company/bank delayed paying the interest on our deposit with them or even worse, did not pay any interest at all. And to compound the problem, it didn’t even give back our original amount.
This is default or credit risk – the risk of not receiving the interest and/or the principal.
It is usually applicable to our fixed deposits with companies/banks, debentures, bonds or similar such instruments.
You can take certain precautions before investing, so as to minimize the credit risk.
One, you should check whether the interest rate being offered is much higher than what the normal market trends indicate. For example, the company may be willing to pay 14-15% on its deposits, whereas the general rates in the market are around 9-10%. Why would the company offer you more? So be very careful of the high interest rate hype.
Two, invest your money ONLY with large, reputed and profitable companies that have a very good track record.
Three, you should check the credit rating given by independent agencies like CRISIL, CARE etc. These companies give ratings such as AAA, AA, BB etc., which indicate the level of safety. Needless to say that better the rating lower would be the interest. So one has to make ones’ own choice – higher safety lower return or lower safety higher return.
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.
Default Risk
Many of us would have been in a situation where the company/bank delayed paying the interest on our deposit with them or even worse, did not pay any interest at all. And to compound the problem, it didn’t even give back our original amount.
This is default or credit risk – the risk of not receiving the interest and/or the principal.
It is usually applicable to our fixed deposits with companies/banks, debentures, bonds or similar such instruments.
You can take certain precautions before investing, so as to minimize the credit risk.
One, you should check whether the interest rate being offered is much higher than what the normal market trends indicate. For example, the company may be willing to pay 14-15% on its deposits, whereas the general rates in the market are around 9-10%. Why would the company offer you more? So be very careful of the high interest rate hype.
Two, invest your money ONLY with large, reputed and profitable companies that have a very good track record.
Three, you should check the credit rating given by independent agencies like CRISIL, CARE etc. These companies give ratings such as AAA, AA, BB etc., which indicate the level of safety. Needless to say that better the rating lower would be the interest. So one has to make ones’ own choice – higher safety lower return or lower safety higher return.
