Get to know the Risk.

Generally you don't have to worry much on the aspect of RISK that prevails in your savings or fixed deposit account kept in the banks. The RISK is almost ZERO as your money is shielded tightly by the bank's financial system. You actually will not worry about losing them and not only that, you also will get a marginal profit out of it. No matter what the health of the country's economy is displaying, or how the global markets are performing, irrespective of that factors, your money in the savings or fixed deposit is tightly protected. At the end of the maturity period, the banks will honour you a paltry extra money known as return (profit) and if you take into consideration of the value eroding inflation 'monster' in valuing your net return, you will be left hi and lo seeing that your return falls under the negative regime. Well, that is what you get to invest or may i say 'saving' in a fixed income or savings account in the banks. Hey! No RISK no gain, isn't true?!! 

Generally this RISK FREE investment products will offer you a return of up to 4.5% or 5% per annum but is this enough?? Please ask yourself this question and what answer will you get? Most average people will be satisfied with this gross return but not all!

A well learned investor knows that inflation rate plays a paramount role in determining the NET RETURN. Current published CPI is about 3.2% but the actual rate could be around 6% or 7%. 

So you see, the net return that you get ( after adjusting inflation rate) on fixed deposit or savings will be negative! For this very reason, we invest our money in equity/balanced funds. This asset types has the potential to generate higher return than fixed deposit or savings account. Even after adjusting the CPI rate, still the return can be expected to fall under the positive area. However not everyone is comfortable with equity/balanced funds type investment products. 

The biggest mistake that those investors who earlier put money in fixed deposits make is that they do not understand about the RISK required by the product. Mostly invest in this aggressive type of investment thinking that RISK is the same, of course it is not! Investors must be comfortable with the type of RISK equity/balanced funds require them to have. In addition, investors also must be able assume the RISK CAPACITY he/she can optimize. And of course, investors must also be in position to understand their own RISK TOLERANCE that the aggressive type asset class require.

The key word here are RISK REQUIRED, RISK CAPACITY and RISK TOLERANCE.

RISK REQUIRED is defined as the level of risk that the investment asset/product are exposed to.

Here investors should pay attention closely and if the match is not at sight, please move away from investing into this type of products. You are required to have accepted the RISK and understand the characteristics of the particular fund's volatility, should you want to invest.

RISK CAPACITY is defined as how much of RISK exposure that you can accept ( maximum). It means that you must be comfortable with the highest peak of maximum RISK exposure , way above the RISK REQUIRED of the product. It could happen due to various risks attached to the product.

RISK TOLERANCE is defined as the amount of volatility that your are comfortable with. Any peak of volatility above the tolerance rate will quickly alarm a panic bell in investors who can only tolerate certain exposure.