Have you tried bungee jumping? In many countries, people tie their body to a long rope and jump down the valley into the sea or river. What is your immediate reaction? You will say, “God that is risky”. That is the answer. Investing is not only about returns; it is also about risk. Remember, every act of investment is a risk-return trade-off. There are two questions you need to ask yourself. Is this the maximum return that I can possibly get for the given level of risk? What is the minimal risk I can take to get my target return on investment?
Let us take an example. Say, you bought a bank FD. You are happy with lower returns because it is safe with the bank and the returns are assured. If a bank FD pays 6-7% you are very glad. That is because FD is safe. But would you be happy with this return if it was equity shares? No, the risk is higher so you will have to get more returns. You have to take risk into account. Typically, higher the risk higher is the returns. That is the basic logic.