risks and returns: what you should know
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Understand the connection between risks and returns in stock market. View our presentation to know how this affects your investment strategy.TRANSCRIPT
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
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