What is risk?
“Risk in investment is often misunderstood, but it is fundamentally tied to the investment choice and the time horizon. When we choose an appropriate time horizon for an investment, the associated risk can become negligible. For instance, long-term investments like Equity Mutual fund generally carry higher short-term volatility but tend to smooth out over time. By selecting a longer time horizon, such as 5 years or above, an investor can reduce the impact of market fluctuations, and the risk of loss diminishes as the investment has time to recover from downturns.
On the other hand, for short-term investments like money market funds or short-term bonds, the risk is usually lower, but they may offer lower returns. For example, an investor with a 1- to 3-year horizon who chooses a high-quality bond, or a Fixed Deposit (FD) faces minimal risk because these assets are less affected by market fluctuations in the short term.
In summary, the longer the time horizon, the less likely short-term market volatility will affect the overall performance, which helps reduce perceived risk.”
For example, imagine we are attending a wedding at a venue 50 km away from our house. The journey typically takes 1 to 1.5 hours. If we leave only 30 minutes before the expected time of arrival, there’s a significant risk of being late. This could lead to rushed and unsafe driving, increasing the likelihood of accidents. On the other hand, if we leave 6 hours early for safety reasons, we might end up wasting valuable time waiting at the destination, making our efforts unproductive.
If you invest in bonds or fixed deposits for the long term, you are taking certain risks. These include the inability to outpace inflation, and after accounting for taxes and other deductions, your real returns may be significantly nil or negligible