Please wait...

Head Start

‘Hi, I came across this interesting article on the Franklin Templeton website. Check it out!’
Identifying Financial Risks

The belief that nothing could go wrong with oneself or one’s family is possibly the biggest harm that one could invite to oneself. It’s akin to living life with misplaced confidence. Risks are omnipresent and may strike any time. Financial setbacks require more convalescence than physical injury as it takes time to rebuild one’s finances. They come unseen and if one is unprepared, could leave the family’s finances in a disarray. The main aim of financial planning is to create financial assets through instruments such as mutual funds (MFs), shares, post office schemes and bank deposits to help you realise your future goals. However, unwanted events can lead to a loss of such assets or depletion of a sizeable chunk from one’s savings. Therefore, it is necessary to be aware of the risks that could impede your saving exercise.

WHAT RISKS

The first step in insurance planning is to identify the events which may trigger a financial risk. Most families face risks to personal lives, property risks and liability risks.

Personal risk is the loss of income and, possibly an increased expense pattern as a result of unemployment, illness, disability or premature death. Property risk is the loss of personal property in one’s household and real estate which could be caused by fire, wind, accident, or theft. Liability risk involves loss as a result of neglect or carelessness resulting in bodily injury or property damage to another person.

Once identified, you can prioritise your risks within each category on the basis of financial severity and the probability of their happening.

Also some risks may be more manageable than others, while some risks may pose significant financial impact but their probability of occurrence is very low. For example, a 35- year-old breadwinner of a family with a spouse and two children with limited An investor education and awareness initiative by Franklin Templeton Mutual Fund This article was part of ‘Head Start’ series which was published in Outlook Money Magazine. Mutual fund investments are subject to market risks, read all scheme related documents carefully. savings, will rate financial severity in case of death to be very high, while a 55-year-old established doctor in fine health may rate professional liability as a greater risk.

WHY IDENTIFY

Identifying risks is more important as they play an important role in helping you meet your goals. Without providing for them the goals may not be met easily. Managing the risks is best met through some kind of insurance which is a hedge against various kinds of risks faced by us, such as, death, illness, disability, or damage to property. The rationale behind purchasing insurance product is that in the event of a setback, the insured or the dependent can be monetarily compensated to the extent of the cover taken.

Identifying and prioritising the risks become important so that you do not miss out on the crucial risks at any stage of your life. At times you may minimize the risks, accept or share a portion of the risks or may even transfer them.

For example, a household with double income will be in a financially better position to mitigate the loss arising as a result of loss of income of the primary breadwinner compared to a family with a sole breadwinner. A second wage earner in the family is one way to protect against complete loss of income.

When you accept any risk, you may begin savings to fund those unforeseen risks or maybe buy a health or a pure term insurance plan to tide over any unforeseen calamity.

Next To Come: The Panacea in Distress