The Risk-Returns-Liquidity Matrix

Hey Friends, 
In the previous article we discussed about the nature of Risk. Now let us go a little further and get an idea of the relationship between Risk and Returns. 

Relationship between risk and returns – risk / return matrix for various investment avenues.

The Rule of the thumb says 

“Higher the risk higher the potential returns and lower the risk lower is the returns”. 

This statement has been tested by time and across various asset classes. It is a fundamental investing rule that if one wants a higher return than the risk-free return, then there will be an element of risk involved. 

For instance, the risk free rate in India is about 8%. So by not taking any risk, an investor can safely earn 8%. Now suppose he want a higher return of say 12%. In that case, to get the extra 4 % returns, the investor will have to take some element of risk whether it is a risk of extra 1% or extra 2% - depending on the type of investment chosen. 

In below table we provide an idea of the Risk-Returns-Liquidity matrix for different investing avenues. 

Investment Type	Risk	Return	Liquidity
Equities	High	High	High
Mutual Fund	Medium	Medium	High
Real Estate	High	High	Low
Bonds	Low	Low	Low
Govt Sec, PPF’s,NSC	Low	Low	Low

Company FD’s

High

Medium

Low

Lets remember - Risk and investment are two sides of the same coin and there will always be an element of risk when it comes to investments.

CA Rajiv D Khatlawala

Author, Consultant and Financial Trainer