Shruti is a 23-year-old software engineer, who recently got her first job. While she has just started on her journey to financial independence, Shruti is clear about one thing- she wants to start investing early and get it right. The only right way to do that, she says, is understanding the risk associated with investment and how to manage it.
Here’s how we can think about it. Taking risks is an unavoidable aspect of life. When making important decisions, we all spend time gathering information so that we can make sound decisions. Financial risks are no different. But women are conditioned to fear the idea of risk and are seldom encouraged to make financial decisions for themselves. This makes their investing and risk journey full of uncertainty. That needs to change. With InvestHER we are putting the spotlight on such central issues.
What Is Risk Management?
Risk management is the process of identifying, assessing, and controlling the risks that can impact financial security and earnings. It provides us with a tool that will help us make an informed choice on where to park our earnings and savings.
Process Of Risk Management
The first step in risk management is identifying the risks. Is the amount of money you are planning to invest reasonable?
After identifying the situation and potential risks, the next step is analysis. Do you have the means to cover the damages, if your investment doesn’t work out? What kind of impact such a loss can have on your family’s financial well-being? Each risk factor can be weighed by the level of impact it can have on your life.
The final step is to consider whether the positive possibilities outweigh the negative ones, and to also analyse your alternatives. Will it be safer to invest a smaller sum, or will it negate all the expected financial gains?
Isha Maithani, a 52-year-old Software Developer from Tata Consultancy Services, is one such woman. “There’s no point in investing if you’re not willing to take risks,” says Maithani, who dabbles in trading stocks. She further adds, “Investing a minuscule portion of money may feel like a safe option, but ultimately it doesn’t yield any notable profit.” That is why she prefers investing larger amounts of money, but in order to do so, she had to learn about risk management.
Can you divide your investment risk?
Yes, you can, by budgeting and diversifying investment to reduce the risk of financial loss. This helps you ensure that you are not financially strapped in case one of your big investments doesn’t work out.
For example, instead of investing 10 lakh rupees in one bucket, you can choose to invest 5 lakh rupees and reduce the amount of risk you are taking. Or you can also choose to park your money in two or three different investment buckets, instead of one (like what mutual funds do with your investments in shares).
Come to think of it, women are experts in this field. Haven’t we all grown up watching our grandmothers and aunts stash their savings across different places in the house? The same principle applies here too.
Is insurance a way of managing risk?
Insurance is also a form of investment that provides a security net for you and your loved ones and helps cover the financial consequences of incidents like accidents or illnesses, or even when your phone or vehicle gets damaged and needs to be repaired.
Nida Rahman, a 43-year-old mother of two, believes that insurance is a must-have to protect a family’s financial security. “Life insurance is an excellent way to make retirement secure and help family members monetary-wise in case an earning member passes away,” she adds.
Rahman also emphasises on the importance of health insurance. “When my father-in-law got sick and was hospitalized, our health insurance helped significantly reduce the amount of money that was spent. Medical bills are expensive after all.”
How much risk should I take?
As women, we should spend time assessing risks and then decide on an investment strategy. But how do we even know if we are on the right track? This is where the risk/reward ratio can help. This is the ratio for a prospective reward that you can earn, for every one rupee you risk on an investment. For instance, a risk-reward ratio of 1:7 suggests that an investor is willing to risk 1 rupee, for the prospect of earning seven rupees. Alternatively, a risk/reward ratio of 1:3 signals that an investor should expect to invest one rupee, for the prospect of earning three rupees on their investment.
So with all these concepts clear, let us make investing a part of our routine but always keep an eye on the level of risks we can take a chance on.
Disclaimer: Reach out to your financial advisor for a better understanding of your risk management needs and investment tools.
The article is published in collaboration with BSE Investor’s Protection Fund to spread awareness with respect to personal finance and investing, especially for women.