Reviewed by Aug 27, 2020| Updated on
Risk capital points to the quantum of investment set aside to contemplate developments. Risk capital is generally utilised in high-reward and high-risk investment strategies.
Diversifying the portfolio is critical for thriving investment of risk capital. This is because the possibilities of every investment seem to be unsure by characteristic, despite the return being well above mediocre when that particular investment goes on to be successful.
Furthermore, investors should make sure that only a particular part of the total capital is made use of as the risk capital. In the case of venture capital, risk capital can refer to funds being allocated to an emerging but unproven startup.
Understanding Risk Capital
Risk capital is the portion of the investment that can be made use of to invest in an opportunity which has the capacity to generate excellent returns. Investors should know that there are possibilities of losing the entire risk capital.
Hence, it is always advisable to restrict the risk capital to under 10% of the overall portfolio. However, seasoned investors, at times, increase this number to 25%, but it is never advisable for someone who has just started their investment journey to allocate such a huge portion towards the risk capital.
Investments that are made with risk capital must be balanced with stable investments that are diversified. If not, you may be exposed to suffering losses that are in the size of your entire portfolio.
What You Should Know
Conservative or the risk-averse investors should try and minimise their risk capital to as low as possible. Investors in thier 20s who have just begun their professional career may increase their risk capital as they have a longer investment horizon. However, investors in their 50s or retirees should keep the risk capital at the lowest.
Risk capital may also be called as 'speculative investing' as it involves a bit of uncertainty. Risk capital may yield a very good amount of returns, or it may completely be eroded; there is no certainty.