The relationship between risk and return is fundamental in investments. Generally speaking, you need to take higher risks in order to get higher returns. Lower risk may mean lower returns.

The concept of return is well understood because it is the end objective of all investments; it is how much money you make from the investment. Return can be in form of income or capital appreciation. However, the concept of risk is not very well understood. Risk is probability of losing your money at any point of time. Risk and volatility are interchangeably used terms. High volatility does not necessarily mean a loss. You will make a loss only when you sell at a price lower than your purchase price. It is important to distinguish between volatility and loss in order to make the right investment decisions.

 

Equity as an asset class has higher risks than fixed income, but as historical data shows, equity has the potential of giving higher returns than fixed income in the long term. Generally, Gold is a step higher than fixed income in the risk gradient. As an asset class, Gold is considered a bit riskier compared to fixed income, but less risky when compared to equities. Gold is also usually counter cyclical to equity; it goes up when equity is down and vice versa. Among all asset classes, equity has the highest risk, but can also give the highest returns over longer investment tenure. For short term investments, risk is an important factor because you may not have sufficient time for prices to recover when you need the money.

You should always invest according to your risk appetite. If you have to explain the relationship between risk and return, please note that higher the potential return, the bigger would be the investment risk and longer the investment tenure.