“No pain—no gain!” You must have heard this crisp quote. When it comes to investment, this philosophy may be extended to read: “No Risk—No Reward!” What this boils down to is: The higher the risk, the higher the reward or gain. The lower the risk, the lower the reward or gain. In fact, the investment risk pyramid provides an interesting insight into this concept of investment.
At the bottom of the investment pyramid is Savings Bank Account. The earnings from this account are minimal in the form of interest on the balance maintained with the bank. This is a low-risk investment. It follows, therefore, that the interest earned on this investment is very low in terms of percentage.
Fixed Deposit Schemes with banks offer a better earning percentage on the amount deposited under these schemes for which a Fixed Deposit Receipt (FDR) is issued. The receipt mentions the details of the depositor together with the amount of deposit, the period for which the deposit is made and the maturity value of the deposit. But, unlike balance maintained under the ‘Savings Bank Account’ which can be withdrawn anytime, the amount deposited under the Fixed Deposit Scheme has a lock-in period. If the amount needs to be withdrawn on account of some emergency, the depositor loses some amount on account of premature withdrawal. It is also called ‘Term Deposit’ in some nations.
Bonds work like IOUs (stands for ‘I-Owe-You’ which is something of a promissory note) between the borrower and depositor but usually bring in more earnings than money deposited with banks. Bond is more risky than Fixed Deposits or Term Deposits. However, the risk level is lower than investment in stocks. Bonds are less volatile than stocks and form a vital component of sensible portfolios as it tends to reduce the overall risk of the portfolio in question.
Investment in property usually witness remarkable growth in terms of value. That is why property is considered to be asset. But investment in property is not risk-free. Though investment in property appreciates over the years, there is always a chance that the value of the property might crash upon impactful changes in the market which reduces the value of the property for some reason.
When you buy stocks or shares of the corporate sector, you become a part-owner of the company with the face value of your investment as your stake in the company. The market value of shares of well performing companies is usually higher than the face value of the shares you purchase. Many a time, it is worth multiple times over its face value. The difference between the face value and market value is called premium when the market value is higher than the face value. Stock markets may experience wild swings. It is the volatility of the market which makes speculation in the stock market challenging. Since stocks represent high return investment opportunities, they come with matching risk rates which is quite high. That is why you have to pick and choose shares from several segments in the market and build a balanced portfolio so that loss in some stocks may be compensated by gains in other stocks in the portfolio.
The latest craze in the investment market is crypto currency. It is a form of digital currency and can be purchased in parts and can be traded internationally. It is not legal in many countries. Since crypto currency is being floated by all kinds of people, one has to be careful in choosing the right one in countries where it is legal to trade in crypto currency. It is the early investors that are known to make more profits in crypto currencies. But this is at the top of the investment pyramid as of now.
Out of the above investment opportunities, it is the savings bank accounts and fixed deposits with banks that are considered to be the safest but the returns on these are minimal. Property is the only investment in which you own the property you buy. In case of stocks, you become a stakeholder in the company to the extent of the face value of your shareholding. In case of other investments, you do not become a stakeholder by investing your money in them.
What we must remember is that the more the chances of returns in the investment, the higher the risk involved. That is what an Investment Pyramid is all about.
