High risk = high return mantra: Does it always hold true?

In an interview to CNBC-TV18, Harsh Roongta, Apnapaisa.com says if you want low risk, it is necessarily accompanied by low return. "If I want the low risk of an SBI fixed deposit, I am not going to get high returns. If I want high returns, it is invariably going to have much higher risk. There is no instrument that can defy this economic principle. It is a very basic economic principle," he adds.

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Below is the edited transcript of his interview on CNBC-TV18.

Q: In your experience, do you think this always holds true because we have seen a lot of investments into the infrastructure, real estate space, in the equity markets not yielding with high returns at all?

A: Any investment has three parameters — risk, return and liquidity. If you want low risk, it is necessarily accompanied by low return. If I want the low risk of an SBI fixed deposit, I am not going to get high returns. If I want high returns, it is invariably going to have much higher risk.

Obviously infrastructure or the other investments, which people have made, were high risk investments. So far, they have not paid off. So, I think that actually goes to prove the fact that when the returns expected are high, it is accompanied by a high risk. There is no instrument that can defy this economic principle. It is a very basic economic principle.

Q: Investor says that she has received an offer to invest in a pre-sale property wherein she has been promised a guaranteed buyback at double the price after four years under a proper stamped and registered agreement with the company. She now wants to know if this is a possibility in terms of an investment option for her. Would you like to comment on that?

A: I think this is a perfect example. Doubling of your money in four years, it's roughly 18 percent per annum compounded return. You do not get that kind of return without some risk. The return of the money as she says is guaranteed. There is a proper agreement. There are probably lawyer stamps all over the paper, but who is guarantying the guarantor? Obviously, if it was so safe, they would not be offering 18 percent. So, I think the point that she needs to realise is that this is an investment that is riskier.

She needs to evaluate the risk. She should not get in saying because it is guaranteed, it is low risk. It is guaranteed by somebody who you need to evaluate. As long as she goes into it with her eyes open and on a certain percentage of your portfolio, you could probably take higher risk, especially if your portfolio is higher. But I think like any other lay consumer she is unlikely to have the stomach for high risks. If she does not have that stomach, I do not think this would be the right investment for us.