Risk Management should ideally be the focus point of everybody who is considering his financial planning for himself. However, its seen that there are many investors who do not focus on this very critical aspect of their investment process.

Usually, investors have to manage 2 types of risks. 1st risk is to the investment that they are making. And 2nd is the risk of any financial hardship to the family member in case of an unfortunate event of a demise or a disability.

As regards to the investment risk, there are largely 4 types of risks that one needs to manage. Firstly, performance risk. Every investor portfolio has exposure to multiple investments and they tend to behave differently over different periods of time. This would have an impact on return on investment over a period of time. Therefore to reduce the impact of these non-performing or low performing investments on the portfolio, it is very important for every investor to have proper allocation to portfolio. So diversification is the key here.

Secondly, volatility risk. Asset classes like equity and to an extent Mutual Funds, which does have the possibility to perform very well over the period of 5-7 years. However, for an investor to benefit from these asset classes they have to encounter the risk of volatility in the short-term and medium-term, which can be done by a disciplined or systematic investment. So being disciplined is the key to benefit over the long-term.

Thirdly, inflation risk. This undoubtedly is the biggest and most anticipated risk for any long-term investor. Therefore, the Asset-Allocation has to be carried out in such a way that it should be able to counter inflation over a long term period. It is also important to invest in those alternatives, which tax friendly. So that investors can earn positive rate of return on consistent basis. This is where We propose options like Mutual Fund, which score over others by far.

Q: Do you know about Term Insurance? Let’s say Rahul is earning Rs 25,000 per month, he can invest over Rs 3,000 per month.

A: A Term Plan is a pure risk cover insurance plan. It differs from usual traditional plan like money-back or endowment plan where at the maturity of the policy you get back some money.

This is a pure risk cover, which means that even if nothing goes wrong with you until end of the term, you will not get any return from the money (premium) you paid but in case something were to happen to you then the beneficiaries can claim amount of risk covered.

The important thing to note here is that these plans are cheaper in terms of premium that you pay. Which also means that the cash outflow is much lesser and you can get much bigger risk as compared to the traditional plan. So, if you are buying a term insurance we would say that you are choosing anideal product.

For Rahul kind of income, if we apply the thumb rule, Rahul will require Term Plan of around Rs 30 lakh. At Rahul’s age it should cost him somewhere around Rs 5,000-5,500 per year.

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