How to minimize risk and invest smartly?

You might have heard people losing money by investing, and yes every investor loses money, after all that’s part of the game. You take the risk, sometimes you earn, sometimes you lose, that's the rule of any business, rather the philosophy of life. All that matters is whether you are making an overall profit out of your investments i.e. your combined portfolio is earning money. The math here is again interesting. Suppose you invested 10,000/- in scheme A and 10,000/- in scheme B. (Remember: We can never predict the future with full assurance, there is always a chance that things might go south)

So,

Scheme A is giving returns of 10 % every year
Scheme B is losing 10% every year

In 5 years,

Scheme A would be valued at,

= 10,000 * (1.1)⁵ [compound interest]
= 16105/- [approx]

Scheme B would be valued at,

= 10,000 * (0.9)⁵ [compound interest]
= 5905/- [approx]

Now the net amount would be,

16,105 + 5,905 = 22,010/-

So, one is losing and the other is earning, but at the same rate, essentially, you would end up making a profit.

This is what we call “diversifying risks”. Invest your money in different schemes to reduce the chance of losing all at once. You would surely lose money in a scheme but other schemes would make up for it. No one can tell if a scheme would make a loss or profit, but chances are equal and there is a risk associated with all schemes, some are low risk and earn less profit, some are high risk and earn more profit.

Diversification of funds

As the old saying goes “Don’t put all your eggs in one basket”, a smart investor will always “diversify his money in multiple avenues”.

You never know what event will come up and a stock price will start falling suddenly, and when it does, it may hit the lower circuit i.e. a level after which no one can sell or buy the stock for the day. Remember when in March 2020, the stock markets fell like anything in just a few days, you cannot be sure of such events, thus diversifying is necessary.

Diversifying means putting your money in a combination of investments avenues like a couple of solid stocks, mutual funds, bonds, gold, etc as explained in our previous article ‘Ok!! But where can my money grow?’.

Booking profits & losses

Never jump to any decisions, never invest in anything just because of ‘FOMO’. Know the investment instrument and decide your risk appetite, i.e., how much loss you can bear if things go south. As we said earlier, sometimes you lose, sometimes you win, the important thing is to book profits as well losses.

You may be riding on a bullish market, a market that is going upwards, thus you may see profits, but all that goes up has to come down, and the faster it goes up, the faster it comes down. Thus when you see a good amount of profit, book it. Sell the shares and get out.

Similarly, you may see losses, and sometimes those may not turn into profits, the trick again is to get out at a reasonable amount of loss and avoid going down further, it is called booking your losses.

This concept is true for stock markets or other trading avenues and we strongly recommend that you don't sell your mutual fund units. Mutual funds are for the long term, you might want to pause or stop your SIPs but seldom buy and share mutuals funds like stock.

Disclaimer: Some stocks are considered to be very good at maintaining market growth and are less volatile, for such stocks you should not care about booking profits & losses.

Current markets (as of August 2021) are very high and are causing a FOMO within many especially the youth, this FOMO buying in turn is causing the bullish trend to continue. Report
Once the capacity of the market reaches a threshold it will start correcting, therefore investing hungrily in current markets may turn out to be a disappointment.
Invest according to your needs and goals, divide your monthly income into needs, wants, and investments, and ‘stick to the plan’ (which is an underrated skill).

A YouTube video by Ankur Warikoo explains more on this, please watch it at
https://www.youtube.com/watch?v=5uaXq-xDp2g&ab_channel=warikoo

By, Varun Gujarathi & Savan Nahar