story of two girls

Story of two girl's

Understanding Risk-Adjusted Returns, the Simply Simple Way, let's say your girl child is returning from school alone using the main road. It takes her 30 minutes to reach. Your neighbor's child does not take the main road, she uses some inside connecting desolate roads and bylanes to get home, she prefers the bylanes because of less traffic along her route, however, the lanes are desolate and prone to attacks by robbers, kidnappers, and accidents because cars drive extremely fast through these lanes. She too takes more or less the same 30 minutes to reach home, thus if the 'time taken to reach home' is the yardstick to measure returns, both girls earn the same returns as they both take about 30 minutes to return home, but is the risk they take is the same???? Clearly your friend's child takes more risk by walking alone in the desolate lanes and bylanes, hence your daughter's Risk-Adjusted Returns are better because she earns better Returns with respect to the Risk taken because she uses the main road which is manned by police personnel all the time and hence pretty safe even though it's a little crowded at times. The crowd actually enhances the safety of the main road, this story depicts Risk-Adjusted Returns -Your child by taking the same time using the safe main road is earning better returns than your friend's child who uses the risk-prone route, even if your neighbor's child takes 5 minutes less because of the by lanes that she uses, still your daughter's risk-adjusted returns are much better because the kind of risk of kidnapping and molestation that exists in her route is far too much of a price to pay for saving just 5 minutes. This example will help you to understand the concept of risk-adjusted returns in investing too.  When 2 people earn similar returns, however, one of them earns by investing in Hybrid Fund like BAF (main road) while the other earns by investing in Pure Equity Fund (bylanes), always employ the services of an expert while investing, the money expert is like having a security guard accompany your neighbor's daughter when she uses the lanes and bylanes route, this nearly eliminates the risk of kidnapping.

This blog is purely for educational purposes and not to be treated as personal advice. Mutual funds are subject to market risks, read all scheme-related documents carefully.

Raja Bhattacharjee

https://www.investmentjunctions.com/