How to Reduce Financial Risk

Everyone who invests money in in any type of business will face the risk. This risk will many type whether this risk may be the loss of investment or loss of return on investment. If you are expert investor, you have to reduce your financial risk at any cost. At minimum risk, you have to generate higher return on investment. Following are the simple steps to reduce your financial risk

1st Step : To Classify All Financial Risks 

There are lots of financial risks. You first classify all your financial risks into different categories. With this, you can understand it better way. All financial risks are of two categories. One is systematic risk and second is non-systematic risk. Systematic risk is the risk of whole market. and non-systematic risk is one company's risk. 

Systematic risks are interest risk, inflation risk and currency risk

Non-Systematic risks are liquidity risk, legal risk, solvency risk

2nd Step : To Invest Money in Different Projects 

There are main investment projects are stocks, bonds, Govt. fixed deposits, own businesses and real estate market. For reducing the financial risks, you need to invest your money in all type of investment project. 

1. For example, 50% Saving, you can invest in Govt. fixed deposits.
2. Next 25% saving in Real Estate 
3. Next 10% saving, you can invest in Mutual funds or bonds and Stock.
4. Next 15% in your own business. 

3rd Step : To Learn to Take Big Risks 

I have simple formula in Taking big risks. Highest risk is in stock market and it has highest profit. You need to learn to take its big risks. You will get passive income from your Govt. fixed deposits. You can buy the shares, mutual funds from it. If you face the loss of return due to decreasing its value, you can tolerate it because your real capital is safe which is in Govt. fixed deposits. 

But there is the risk of inflation and interest risk is also on Govt. Saving and Fixed deposit money. From last five years, we are seeing that rate of interest is decreasing. From 12%, it has reached 7.5%. Second, there is big prices of every domestic products. So, inflation is increasing with fast rate. So, you can make the plan. After investing 25% in real estate, you have to construct its building with your fixed deposit interest. With this, you have to generate new passive resource which will rent. Which will increase from time to time. Second, your real estate value will increase which will help to reduce inflation risks. 

4th Step : Adjustment in Your Investment

Sometime, you can use the tool of adjustment in your investment for reducing risk. It means, to invest more money for reducing risk. It means to sell at the beginning time of loss after estimating your risk tolerating power. Same money invests in other profitable projects. 

Sources and Citations

1. Tips for Better Management of Money eBook
2. Financial Management Notes eBook

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        Accounting Education: How to Reduce Financial Risk
        How to Reduce Financial Risk
        Accounting Education
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