Risks and returns: What you should know

Weigh Risks & Returns• In your growing up years, you may recall being warned about your eating

habits. You were told about the downside of gaining weight early in life

after eating too many pastries.

• Similarly, as you look to invest your financial surplus, you want to weigh all

possible risks associated with investing. Money is precious. It never feels

good to lose it, especially if it is your hard-earned money.

• Here are a few things to know about the connection between risks and

returns, and how they affect your investment strategy:

Risk-Return Trade-off

• Greater the risk an investor takes, higher are the chances of returns.

This also implies that there is a great chance of loss.

• Similarly, lower the risk, lower the prospects of making good profits along

with a minimal chance of damage. This is called the ‘risk-return trade-off’.

• Because of this trade-off, an investor is forced to compromise on both

risks and returns.

Identify Your Risk Profile

• If you want to make money, you have to take on some risk. Similarly, if you

cannot take much risk, you will have to settle for lower profits.

• As a result of this ‘risk-return trade-off’, your risk appetite as well as

financial goals affect your investment strategy to a great extent.

• For this reason, before investing, you should identify your risk profile,

figure out your goals and the need for cash.

Diversify Your Portfolio

• The best investment strategy is diversify your portfolio to a wide range of

both high as well as low-risk securities. The exact proportion of this

mixture would be decided by your profile.

Where To Invest

• Stock markets have the greatest potential for giving maximum returns

among all financial instruments.

• Debt instruments like government bonds, bank deposits have the lowest

returns because they are considered the safest instruments.

• If you are a low-risk investor and yet you want to take a calculated risk, you

could invest most of your funds in debt instruments like bonds and fixed-

deposits.

• At the same time, you invest a small portion – say 10% -- of your corpus on

equity-based mutual funds or a select few stocks.

• The reverse also holds true if you are willing to take high risks. The limited

exposure to low-risk assets will help act as a buffer during poor market

conditions.

What Type of Investor Are You

• The biggest mistake investors make is panic-selling during bear

markets.

• As an investor, you should understand that just because the benchmark

market index is down, it doesn’t mean that your assets will underperform.

• Even during prolonged economic slowdowns, some assets outperform

and give good returns. The trick is to identify these and ride through the

market lows.

Facing Market Fluctuations…

• For this reason, it is best to buy good quality stocks of financially healthy

companies.

• This requires a great deal of research before investing in any asset. If

you are confident about your investment, you sail through market lows more

easily.

Purchasing The Right Stocks

Rupee-Cost Averaging

• Sometimes, it is also a good idea to buy when the market falls. This is

called rupee-cost averaging.

• For example, you bought a stock for Rs 1000. Soon after, the share price

fell to Rs 800.Buying another stock at this rate would bring down the average

per-share cost of your investment to Rs 900. This way, if the share price

goes up to Rs 2000 in one year’s time, the amount of profit you earn is Rs

1100, and not Rs 1000.

Happy Investing

Thank You

KAPIL KUMAR Call us: 9136189547

E-mail: kapil018delhi@gmail.com

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