In the world of investments, risk is often directly proportional to potential return.
What it means is higher the risk, higher the chances of potential returns and lower the risk, lower the returns. To achieve the desired return, you must be willing to take a certain amount of risk.
Risk return trade-off looks at balancing the lowest risk you can take with the highest return you can achieve with that risk. It is essentially a trade-off that you, as an investor, face when choosing risk and the potential return associated with it.
However, it should be noted that high risk does not always ensure high returns. Risk means that you have a chance of incurring a loss on your investments as well.
Investing wisely entails investing based on your risk tolerance and risk appetite. The terms risk appetite and risk tolerance are often used interchangeably. However they represent different concepts. Risk appetite is the desired level of risk that you can take in pursuit of your financial goals. Risk tolerance reflects the variation in returns that you are willing to tolerate. Risk appetite and tolerance depend on your investment goals, age, income and psychological comfort with the level of potential loss you may be able to take.
Taking on some risk is the imperative when it comes to generating returns. While one cannot eliminate all risk, one can invest wisely such that one generates returns and still enjoys peace of mind.
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