Risk is now being experienced by everyone. Many investors are becoming aware of the danger they are incurring as a result of the fact that the majority of mutual fund schemes have lost at least 10% in the previous three months. Many investors, nevertheless, still struggle with understanding the notion of risk. You can find out what we are implying by asking your pals, so do that.
The fundamental issue is your desire and capacity for taking chances. Most investors don't understand this distinction. When the market is performing well, most investors also become more risk-taking. When the market enters a terrible phase, they start to become risk-averse. Therefore, it's imperative that you recognise the difference between your capacity for risk and your risk tolerance.
If you have the financial means, you have the capacity to accept the risk involved in an investment. You may, for instance, be quite wealthy. You can thus afford to take chances. It's also possible for the reverse to occur. You don't have much money, therefore you can't afford to take chances. Your readiness to take chances comes next. It is often referred to as your risk tolerance. A wealthy individual, for instance, may afford to take risks, but he dislikes doing so. Someone else could be more eager to take chances.
As a result, it's critical to recognise the differences between these two factors and establish a balance between them. You may select highly secure investments if you completely avoid taking any chances. This implies that your returns will be quite low. You run the danger of losing your money if you take on too much.
We constantly advise clients to select mutual funds in accordance with their objectives, time horizon, and risk tolerance. Your main goal while investing for a short period of time is to protect your cash and generate higher post-tax profits. Then a debt mutual fund, similar to a liquid fund, is your option. A debt fund, such as a money market mutual fund, is again your best option if you want to invest for around a year. What if you plan to invest for three or more years? Debt mutual funds, such as corporate bond funds and banking & PSU funds, are an option. Because we think normal investors will find it challenging to predict interest rates and schedule their investments, we don't advise users to invest in gilt funds or long-term debt funds. Long-term debt funds and gilt funds are particularly susceptible to fluctuations in interest rates. When rates rise, they lose.
You can invest in equities mutual funds if you want to hold your investments for five to seven years and don't mind taking some risks. Always keep in mind how dangerous stocks and equity are. Money might be lost, but you can also get better returns. When you invest in equities mutual funds, you are accepting that risk. Short-term equity investments are incredibly hazardous. However, the risk decreases if you make more investments over time.
What happens if you're willing to take a risk but wish to avoid taking any more? In other words, you want to build wealth steadily over time, without taking on too much risk or volatility. You are a cautious stock investor, in which case you should pick large cap mutual funds. These funds invest in exceptionally strong, very large enterprises, as their name implies. They are the least erratic and perform somewhat better in a bear market. You can invest in flexi cap funds if you're ready to take on a little bit of extra risk or moderate risk. These programmes make investments across industries and market capitalizations.
For aggressive investors, there are several options, including big and mid-cap schemes, mid-cap schemes, small-cap schemes, sectoral plans, etc. Keep in mind that these schemes are hazardous and that you should only invest in them if you are familiar with the market. Additionally, you must to be able to handle volatility and potential losses, as well as have a longer investing horizon.