Investing Principles

"Returns matter a lot. It's our capital."

Abigail Johnson

Before embarking on the journey of investment, every investor needs to identify these three things:

• Risk Risk in investment refers to the volatility in returns. It is to be noted that return on investment is directly proportional to risk. Higher the risk in investment, the higher returns it offers, and vice versa. For example, a savings account offers the least volatile returns. Your money is the most liquid yet offers the lowest returns. On other hand, equity offers the highest returns yet comes with an increased risk of volatility.
• Asset Allocation Asset allocation refers to dividing your total investment amount into different asset classes such as bonds, equity, gold, real estate, etc. An investor who is looking for the least risk and fewer returns will invest around 70% money in bonds, debt funds, etc., and 30% in equity. While this may not offer high returns, those looking for safe and liquid options will opt for these. An investor who is looking for high returns will invest 70% in equity and 30% in debt and bonds as a hedge. While he may receive higher returns ( 8%-16%), it comes with inherent volatility risk. Hence each investor should do proper research, and identify their risk tolerance, their investment time period, and their goals to properly decide how much to invest and where.
• Diversification Diversification refers to spreading the investment in each asset class. For example, if investing in equity, you have large-cap,mid-cap, and small-cap. In bonds, you have gold bonds, govt bonds, etc. While diversification ensures you are not putting all eggs in one basket, over-diversification will most likely lead to time wastage with little to no gains.