An investor must be aware of the instruments he chooses to invest

ing in its commitment of payment is a risk that must be considered before making investments.

Is there a way we can mitigate the risk of default and credit risk? Credit rating agencies come out with credit ratings of various instruments. Again this is not a 100% accurate method, as the ratings can be downgraded/ upgraded based on the financial performance of the corporates.

Liquidity is another factor which you must consider while investing in debt instruments. For a layman, it is the possibility of not getting the principal back ment. This is where you need to plan for time horizon required in your investment instruments.

How do you tackle the interest rate risk? Holding the instruments till maturity. Irrespective of the interest rate movements you will continue to get the rate offered at issuance. But then you still carry the risk at the time of reinvestment/maturity if the rates fall.

Inflation risk is in-built in the investment and there is no hiding from it. The longer the tenure of the instrument, the higher the exposure to the risk. To counter inflation risk, one must look at the asset allocation strategy.

Investment approach

In investing, once you know, which road not to take, it becomes all the more easier. The basic checklist will help you to take informed decision in the investment process. When investing for short term, liquidity is the key measure. You need to have the money, when you need it without any haircut. For investing in longer time frames, regularity and certainty of cash flow must be considered. Inflation risk and reinvestment risk are inherent and cannot be done away with.

Risk is inherent in investing, the nature of asset class, being agnostic. Knowing why we are investing and prior knowledge and information of the risks associated with the investments is the approach to execute. What is, however, observed is the exact opposite – first invest and then worry. The writer is founder & managing partner, BellWether Advisors