Risks and the Stock Markets - Part 2 of 7

I’ll like to keep emphasizing through these series that one needs to look at ‘risk’ as the measure of gain / opportunity.

We all by training are conditioned to risk in almost everything we do which also includes our views about investing.

To invest (especially money) by definition is always about a profitable return. If you notice, ‘investing’ has no risk!!

Essentially, the problem lies not with investing but with the latter part of the definition, ‘profitable return’. This brings the concept of the risk-reward ratio.

From childhood, we are trained to save. The simplest form of saving was not to spend the money but to keep it aside in a ‘piggy bank’. Our parents saved in a slightly organized manner – they saved in PPFs, FDs, Savings Accounts, NSCs, etc. Fortunately, all these gave very ‘profitable returns’ and since most or all these instruments were backed by the government, there were ‘safe’.

But in our childhood did we realize that the money in our ‘piggy banks’ grew only if we saved more? By saving we only postponed our impulse to spend.

If I told you that the ‘Deposit Insurance & Credit Guarantee Corporation’ (a wholly owned subsidiary of RBI set-up in 1962) guarantees ONLY Rs. 1 lac regardless of the number of accounts (or type of accounts) held by a person in same capacity and the same right.

Essentially, if you held a savings account and / or current account and / or fixed deposit with one / more branches of the same bank, AND if the bank went bust, the MAXIMUM amount RBI will compensate will be Rs. 1 lac or the sum total of your money in all accounts whichever is LESSER.

With the above new input, is money in the Bank really safe? Is the return risk-free? Shouldn’t we just keep money under our pillows / beds (like the big politicians do) or just keep it in a PIGGY BANK!!

References –

www.dicgc.org.in

www.dictionary.com