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The purpose of making an investment can be several as are the risks associated with them. Though there is always a certain amount of risk in every investment, it is one of the most misunderstood aspects of choosing an investment tool. Before you make an investment decision, it is imperative to understand and minimise the risks involved by doing a risk assessment.
What Is Risk Assessment?
Risk assessment can be explained as determining the various aspects of losses while making investments. This process helps evaluate if a certain investment is worth making and how you can alleviate the risks involved. It also helps you understand the rate of return you may gain from the investments and the measures to take in order to ensure a successful investment.
The Importance Of Risk Assessment
There are several thoughts that may cross your mind when you invest your money. Would you lose your money, is it a good decision, hope that it won't turn out to be a bad investment are just a few apprehensions that arise. Despite these fears, it is a generally accepted norm that there is no reward without risk. This is particularly true of investments like bonds, stocks and mutual funds.
Making investments is a huge decision and so having a good idea of every aspect of the risks involved is necessary. With risk assessment, two key areas are addressed. One is that you can gauge your financial risk taking capacity and the other is to understand the risk tolerance level of the company.
Steps For Risk Assessment
The risk assessment process comprises of four principal steps. The first one is for the chosen financial institution to evaluate the scope of the review and familiarise you about business practices and training and response protocols. You will also have to be introduced to the laws and regulations that apply to the company and its activities. This is important particularly in a country like India, considering the changing political scenes, and with it, the government regulations.
The next step involves thorough gathering of data regarding the possible pitfalls the company may encounter. For example, in India, businesses should be prepared to deal with corruption and money laundering risks. An elaborate view of these risks is critical for a meaningful risk assessment.
The third step is analysis of the gathered information, relevant documents and interviews to subsequently create a report determining the company’s risk profile and recommend guidelines to improve its compliance program. This principle step will help better identify the major risks within the company’s profile that would have to be taken care of on priority.
The fourth and final step of the risk assessment process is to integrate the final report’s findings which would include suggestions to better the financial institution’s compliances programs and deal with the risks the company may face while making investments.
Finally, businesses and financial institutions should make the most of the potentially fertile business environment. Nevertheless, getting a tailored risk assessment before you invest can reduce many unwanted risks that are often encountered in this informal economy.
To offload the work that goes into risk assessment, hire yourself a investment banker for yourself.
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