Balance Risk and Reward
When it comes to investing, risk and reward are inextricably entwined. You've probably heard the phrase "no pain, no gain" – those words come close to summing up the relationship between risk and reward. Don't let anyone tell you otherwise
The tradeoff which an investor faces between risk and return while considering investment decisions is called the risk return trade off. It is based on the principle that potential return rises with an increase in risk. Low levels of uncertainty (low-risk) are associated with low potential returns, whereas high levels of uncertainty (high-risk) are associated with high potential returns. Because of the risk-return tradeoff, you must be aware of your personal risk tolerance when choosing investments for your portfolio. The graph below shows the historical returns and volatility of asset classes.
Past Performance may or may not sustain in future. Volatility is annualized Standard deviation and Returns are in CAGR terms. The period of the same is 1st April 2002 to 31st May, 2015. Portfolio of Equity is CNX Nifty, Gold is Gold in INR terms, Fixed Income is I-Sec Composite Index and Commodity is RICI Commodity Index. Source: Bloomberg, 31st May 2015.
Margin of Safety
Benjamin Graham and David Dodd, founders of value investing, coined the term margin of safety
- This is the central thesis of value investing philosophy which espouses preservation of capital as its first rule of investing
- The margin of safety protects the investor from both poor decisions and downturns in the market.
Watch out this space for more, next we will cover “Asset Rebalancing” in our next article
MUTUAL FUND INVESTMENTS ARE SUBJECT TO MARKET RISKS, READ ALL SCHEME RELATED DOCUMENTS CAREFULLY.