Investment strategy: Know these six important things about risk-taking

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Risks and returns are usually directly proportional which means higher the risk, the higher is the return and if the risk is low, so are the returns. Balancing between risk and return is a tough game. People often take risk, but there should be a limit, recommend experts. Money9 brings you several basic points that you should keep in mind before choosing an instrument for investment.

Balance your investment

Opt for asset classes with different levels of risk-return profiles. Doing this might not guarantee a profit every time, but it will reduce the risk factors.

Equity usually has the highest level of risk in the short term but can give higher returns in the long run.

Experts say one should try to balance one’s high-risk investments with medium-risk and low-risk options.

Asset allocation

One should distribute the total investment according to age and risk apatite. Normally these can be distributed among equity, debt and gold or property.

“As a beginner, it would be a good strategy to gradually increase allocation into equities. It is fine to have a higher allocation in the bank and debt instruments at the initial stage,” said Nilotpal Banerjee, an investment planner based in Kolkata.

Review your investments

To be a successful investor, take calculated risks. For instance, while evaluating a stock for investment, experts say look at its price movement and the financial health of the company.

Review the company’s financials and do a trend analysis of its stock price movements.

Additionally, you can also take reliable financial advice and guidance from credible financial experts. To make sure your investments are on track review your portfolio periodically.

Emergency fund

Covid-19 has made us understand the importance of emergency fund. An emergency fund is a corpus equal to minimum six months household expenditure. This fund is required to protect a family against any unforeseen situations such as job loss or medical emergency.

Develop your emergency fund using short-term debt mutual funds or liquid funds, as they are liquid and easily available when needed. Also, it is advisable to divide the emergency money into four or five buckets. That will help you during unavoidable situations.

Retirement planning

For a young investor, retirement is often an ignored goal. But you should plan it from the very first day of your investment and take a bit of risk that is needed for a healthy corpus at the age of 60 or 65 years.

NPS is an appropriate instrument that can help you to build a nice corpus if you begin to invest early. ns if you want to plan it from the very first day. A young investor can put 75% of the total money of NPS into equities and 25% in government and corporate bonds. This fraction is quite risky, but in long run it would yield a better return.

“The returns of NPS would be high and risk proposition is a bit low than other high return instruments,” said Arvind Agarwal, Income Tax expert from Kolkata.

The good part is that if you start investing early, you will need a small amount to accumulate a large sum at retirement. You may also create a separate equity MF portfolio along with some portion of savings in NPS for retirement.

Risk factor

This has to be decided by the investor. It would depend on his/her age, knowledge, and experience. For instance, if the investor is young and does not have family responsibilities, he/she can take high risk. The goals of an investor change with marriage and after the birth of the first child.

Therefore, depending on your risk appetite and current situation, you should approach and choose investment products accordingly. First draw up a plan for yourself and consult a professional financial planner for alteration and modification.