Many people assume that their risk appetites are dissimilar and in many cases, they are not wrong. One individual may not be comfortable allocating a sizeable chunk of his investment to market-linked funds, which are riskier than secure investments like Fixed Deposits. On the other hand, another individual may decide to invest lower amounts of money in FDs and instead try to beat inflation with higher returns from market-linked funds, which are riskier. Where to invest one’s hard earned money is a question that everyone deals with at varying stages of life. However, the answer to this is not always any particular mutual fund/stock as many people feel.
There are three aspects to be considered here-
The asset class in question, i.e. debt/equity/cash
The investment product, i.e. any particular stock/mutual fund/PPF to fixed deposit among other schemes
The asset, i.e. invest in fixed deposit/mutual fund/debt fund/direct equity
In fact, risk appetites notwithstanding, certain basics can be streamlined for all investors, irrespective of their risk appetite. When it comes to finalizing the asset class to invest in, you should bear in mind that inflation is the biggest enemy that you have to counter. When you want certainty in terms of returns and interest and safety of your capital along with fixed income, you should choose FDs investment or debt funds. However, if you have a higher risk appetite, you should go for equity mutual funds or stock-linked investments since these are risky but offer lucrative returns.
For example, if your daughter will go to college at least 3-5 years later, your money should be invested in fixed income generating assets so that you are not impacted by stock market upheavals while if she will go to college in 15 years, you should invest more in equity.
When it comes to choosing the right asset, you should decide whether in case of equity, you will put money directly in stocks, mutual funds or simply get a portfolio manager if you have a considerable surplus. If you want to invest in fixed income, you have to choose between debt mutual funds, fixed deposits, company bonds, company FDs gives high rate of interest and government bonds among other instruments. The decision will always be based on factors like the returns, security, costs, taxes and overall convenience.
While choosing the product, you will find it easier to choose once you have chosen the asset class. You should understand the amount of risk that you are willing to take. While you are investing in equity, you should be prepared to withstand market volatility while staying invested for the long haul. This risk usually goes down over a longer period of time but never goes away. Once you are prepared for a long-term game, the question of risk appetite within an asset class goes away with no added differentiation. There is a difference between regular speculative taking of risks and risks linked to the asset class.