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Returns and risk are inseparable in the world of investments. However, a wide variety of tactics are available to effectively manage and mitigate risk while investing in UAE.
Risk in terms of finance can be defined as a deviation from the anticipated outcome. The deviation observed during the course of investment might be positive or negative. The investment market offers returns based on the level of risk an investor is willing to take. Investment vehicles that essentially involve higher levels of risks usually yield higher rates of returns when compared to investment vehicles that involve a lower degree of risk.
If you are planning to invest in UAE, then this quick read will help you to mitigate and manage risks in your investment portfolio.
Investment risk refers to the probability that the return on investment (ROI) will be lower than the expectations of the investor. The fear of losing one’s hard-earned savings prods investors to choose conservative investment tools due to the lower levels of risk involved in them.
Investment risk is a general term and includes all types of risks that an investor might encounter while investing in UAE. Risks can be categorized into different categories based on their nature. Different types of investment risks are as follows-
Market risk commonly called systematic risk is the most widely encountered form of investment risk. When the market is subject to phases of instability and disturbances then securities tend to behave in the same way. For example when the stock market experiences instability than the value of market-based securities like mutual funds and stocks also decline at the same time. On the other hand if the market witnesses a sudden raise the value of securities also shoots up.
Inflation risk is another common form of investment risk in UAE. The decline or depreciation observed in the value of an individual’s investment portfolio primarily due to a drop in the purchasing power of the currency, as a consequence of inflation is called inflation risk.
Financial advisors and economists suggest considering inflation while evaluating returns on long term conservative investment vehicles like bonds, ETFs, etc.
Credit risk comes into picture when the investment tool involves some level of credit in it. Credit risks can be defined as the bond issuer’s capability to repay outstanding debts after the maturity period of the investment.
Investment vehicles based on fixed income approach are subject to interest rate risks. Interest rate risk can be defined as the probability of a drop in the price of the security with an increase in the rate of interest.
Investors can use the technique of standard deviation to calculate the level of risk involved with a particular investment tool. Standard deviation is a statistical measurement of the dispersion of return from standard tendency. Investors can look upon the average return yielded by the investment vehicle and then calculate the average of the deviation observed during the course of the investment.
In order to manage and mitigate investment risks in UAE investors need to focus on various detrimental factors that might expose their investment to potential risks. In this section of the article, we will be discussing different tips that will help you to reduce the risks and their impact on your returns.
Building loss plan is the first step in order to avoid the impact of risks while investing in UAE. Market swings might affect your returns and cause disturbances in your investment portfolio. If you have a well-structured loss plan you can cover your losses and avoid the same mistakes in the future.
The best way to safeguard your investment portfolio from potential risks is to add diversity into it. Diversity in terms of finances refers to the process of investing in different securities that are not directly related to each other. Adding diversity to the investment portfolio not only helps investors to mitigate risks but it also helps them to reap lucrative returns over a longer time horizon.
It might appear tempting to trade with borrowed capital however, doing this might increase the degree of risk involved with the investment. Undoubtedly, levering investments multiply the gains but it also makes investments prone to sink in losses. A common practice that adds excessive leverage to the investment portfolio of an investor is irresponsible trading.
The right way of doing this is to strike a balance between trading options so as to minimize the level of risk. Furthermore, choosing options that suit your risk profile would also reduce the various risks.
Portfolios with higher levels of volatility have negative impacts on long term returns. The higher will be the volatility in an investment portfolio lower will be the rate of return. Although it is practically impossible to completely eliminate volatility from an investment portfolio, it can be reduced.
From a practical perspective, returns are inseparable from investments and returns. Every investment tool available in the market is subject to some degree of risk. However, with proper financial planning and assistance, the level of risk can definitely be reduced.
A strong understanding of risks and their impacts on investing in UAE will help investors to mitigate the risks. Investors can follow the mentioned tips to minimize risks and extract the maximum benefit out of their investment in the UAE.
Investors should focus on building a loss plan and implementing the adaptive allocation of assets to counter risks while investing in UAE.