How to invest intelligently and lower your risks

Saving your earnings in bank deposits is not enough to create wealth. Most financial experts advise making intelligent investments while being unable to explain the term in the context of every individual. This is because the understanding of investments differs as much as risk appetite. However, for substantial returns, taking some amount of risk is necessary. Avoiding investment in risky market instruments altogether to escape the risk of wealth erosion does not help. The idea must be to take measured risks that ensure wealth creation in the long run.

The risk-return interplay necessitates one to take risks to garner greater returns. However, adopting certain risk investment strategies may help to alleviate the risk involved. Some of them include:

Allocate wisely: Reckless investments do not help. You must invest as per your risk appetite. This means that you may choose between high-risk investments like equity stocks, medium-risk investments like bonds and low-risk investment options like money market instruments and bank deposits. CS Sudheer, founder and CEO, IndianMoney.com, says, "Investment proportion depends on age and financial goals. A 25-30-year-old must invest at least 25% of monthly income based on the risk profile. A basic thumb rule is to invest as much as you spend each month. For early retirement invest double the amount spent."

Diversification is the key: Your financial goals must be in sync with your risk appetite. As opposed to making random investments, choose to invest in a particular asset class. Many people make the mistake of buying shares or stocks of some specific company or sector. Instead, diversify your mutual fund portfolio in a way that includes a healthy combination of large-cap, mid-cap or small-cap mutual fund schemes investing in high-growth sectors. Raj Khosla, founder and managing director, MyMoneyMantra.com, says, "Investment in mutual funds requires informed decision making: One must consider factors such as investment goals, risk appetite, time horizon, performance analysis and the expense ratio involved. To establish a bespoke portfolio, individual investors are best advised to seek guidance from a professional fund manager."

In sync with the market: Observing the market movement closely is a must. Timing is everything when it comes to investing. Refrain from following the herd. Look and assess how your choice of the stock moves in a bull or bear market. Investing systematically helps to buy units of stock, thus, leaving enough to invest in other financial instruments. Dinesh Rohira, founder & CEO, 5nance.com, says, "SIP is a discipline that will allow you to build a sizeable corpus over a period. Invest what you can before you spend each month. With compounding, a regular SIP of Rs 5,000 can yield you Rs 3.5 crore at your retirement provided you start at an early age in good funds. Flexibility to choose the funds adds to the convenience and efficient returns. Any if you missed the time, keep topping up with the additional savings each year."

Know your limits: Not all people have the same reaction to market movements. Some may be complacent when the market goes berserk while others may run for cover in response to the bearish market. Realise the quantum of risk you are willing to take depending on your short-term and long-term financial goals, current earnings and liabilities. Many people want to know how to invest in a way that allows less scope of being affected by market risks. Sudheer says, "Invest based on risk profile. Fixed-income investments are relatively safe from market risk but yield lower returns. Invest in the long-term for maximum profit. Don't panic and liquidate investments at a loss when markets are down. Never borrow and invest."

Risk-averse investors have more investment options than they can fathom. Suresh Sadagopan, founder, Ladder7 Financial Advisories, says, "A risk-averse investor may look at a bank or government-oriented schemes like fixed deposits, government bonds, tax-free bonds, PPF, high-quality corporate deposits/ NCDs, small savings schemes like NSC, KVP, etc. If they are senior citizens and need regular income, they may look at the Senior Citizens Savings Scheme or the Pradhan Mantri Vaya Vandana Yojana. Except for tax-free bonds & earnings from PPF, income from every other instrument would be taxable that needs to be borne in mind while investing."

Also, investments in gold bonds or gold ETFs help. Prasanna Pathak, head - equity & fund manager -Taurus Asset Management, says, "Investment in gold bonds/gold ETFs is certainly advisable from an asset diversification point of view. These instruments are better than buying physical gold as the transaction costs involved are much lower and one need not worry on other issues like the purity of gold and storage. Gold bonds also offer a marginal interest rate of 2.5% every year and are exempt from capital gains tax, if held till maturity. However, the holding period is eight years. Gold ETFs, on the other hand, offer liquidity and low transaction costs. Typically, the recommended allocation to a combination of gold bonds and gold ETFs is roughly 10%."

Evaluate your risks: Successful investors rarely comply with what the people around them say. Rather they prefer to carry out detailed research before making investments. Consider the real worth of the investments before paying for it. Check if the stock's market value is greater or lesser than its intrinsic value.

While there may be several factors affecting your investment choice, it helps if your investment suitability is according to your risk capacity. Manoj Agrawal, director legal & compliance, Risers Accelerator, says, "An intelligent investor urges a higher return on the least probability of losing money in a portfolio. So, it is the responsibility of a consultant to convince the investor for an option which accrues lower risks and high returns. The best ways to ascertain more profit and less risk are choosing a diversified portfolio, preferring index funds, setting a risk threshold, and doing research-based forecasting rather than responding to speculations."