Risk is usually understood as “exposure to a danger or hazard”. In investment decisions, risk is defined as the possibility that what is actually earned as return could be different from what is expected to be earned.
For example, consider an investor who buys equity shares after hearing about the huge returns made by other investors. He expects to earn at least 50% return within 2 years. But if equity markets decline during that period, the investor could end up with negative returns instead. This deviation between actual and expected returns is the risk in his investment.
Stock Tips In The Stock Market
All investments are subject to risk, but the type and extent of risk are different. Thus, it is important to understand the common types of risk and evaluate investments with respect to them. Understanding the risk will help an HNI trader decide the impact it will have on their financial situation and how to deal with it. The risk that an individual will be willing to take is specific to their situation in life. Some risks will require strategic portfolio changes to be made, such as the extent of diversification in the portfolio. This is often managed by the stock tips providers as a supplementary service. Other risks may be managed tactically, for example making temporary changes in asset allocation to deal with a risk.
Default risk or credit risk refers to the probability that borrowers will not be able to meet their commitment on paying interest and/or principal as scheduled. Debt instruments are subject to default risk as they have pre-committed payouts. The ability of the issuer of the debt instrument to service the debt may change over time and this creates default risk for the investor. The best HNI tips providers ensure that their clients never get into such troubles and overcome them.
The sovereign government as a borrower and institutions associated with the government have not credit risk as they have the means to raise funds through taxation, international loans and even print notes as a last resort, to repay loans. All other borrowers have some degree of credit or default risk associated with them. This is measured using the credit rating assigned to a debt instrument.
Credit rating is an alpha-numeric symbol that expresses the credit rating agencies assessment of the ability and intention of the borrower to meet the obligations arising from the debt.
SEBI has standardized the symbols used by credit rating agencies. Symbols such as AAA, A1 indicate the highest degree of credit worthiness while D represents default status. The credit rating is not a static parameter and is liable to change every time there is a change in the fundamentals of the company that will affect its ability to meet its obligations. The rating may, therefore, be downgraded to reflect a greater perceived default risk or upgraded to indicate lower risk. The financial situation of the issuer is monitored by the credit rating agency till the instrument is redeemed on maturity.
Monitoring the credit quality and exiting a bond whose credit rating is likely to fall to levels where the investor is uncomfortable with the risk, is the way to handle the credit risk in a bond. However, the low liquidity in the bond markets is likely to make it difficult for the investor to sell, especially when there is a likely downgrade. Holding a diversified portfolio of bonds is the best way to protect the investor’s portfolio from the default by one issuer. This is exactly what 24 Carat Financial Services is known for.