The investment process mainly depends on the risk the investor takes and the return s/he expect from that investment. Thus RISK and RETURN are the two sides of the same coin that are called INVESTMENT.
Risk is experienced in every type of investments and asset classes. The intensity and the impact it may create changes with the asset class. The equity asset class is assumed to be the riskiest asset class. Equity is surely the riskiest one but it has great potential to generate a handsome return in long term.
Most of the time retail investor gets confused with RISK and VOLATILITY. These terms are used interchanged but they care about different meanings.
Risk is a threat of permanent loss in the portfolio. This loss may not ever be regained if we take a long term view. The stock price of some good bluechip companies turned so downward that the investors could not recoup the losses they make in such stocks. So such a situation can be called risk.
Whereas Volatility is a temporary cause of a decrease in portfolio value. The investor can recoup the losses by holding the investment in long term. Such type of looses is not caused because of the fundamental of the stock but because of economic and political uncertainty prevailing at that time.
That why one should always access self-risk as well as product risk before investing it. If that product risk parameter matches your risk-taking ability in the long term as well as in the short term then only invest in that product. Whereas volatility is good sometimes as at that time we come to know which company or which mutual fund is in demand even the market is going down. In volatility, investors prefer only those companies which show their metal in fundamentally as well as technically. So in the downturned market, those stocks are at 52 weeks high one should invest in such stocks as they are performing in a down market they will surely shine in an upward market too.
2020-21: What to do and what not to do for long term investment?
Where to invest your hard-earned money in the remaining months of 2020? After experiencing market volatility so far, there is a fundamental question in the mind of every investor. Half a year has passed. And for the last few days, we have been seeing fluctuations not only in Indian but also in global stock markets. Uncertainty is not over yet. The Sensex and the ground reality do not seem to be related. Therefore, volatility in the market will continue throughout the year.
When investing in such a time, invest in different asset classes according to your financial goals, asset allocation required for each and every goal.
# It’s a good time to invest in good quality stocks but only invests in stocks of bluechip companies.
# Choose good multi-cap when investing in equity mutual funds. Use an index fund as a supplement.
# EPF, PPF VPIF, and NPS are best for long term investment for the debt asset class. For Short term view, bank/post-term deposits and liquid funds are good.
# You can invest digitally in gold. Sovereign Gold Bonds and Gold ETF are good options.
# It is best to stay away from real estate for a while.
One thing to remember:
Long term investment does not depend on short term market volatility. An investor should focus on long term wealth creation. In DIY s approach while constructing your portfolio one should focus on financial goals, risk profiling, investment horizon, and tax implication and then select a suitable financial product.
The investment process is a marathon, not a sprint. An investor should always focus on long term wealth creation. The investor should learn from his/her mistakes and try to rectify it in the coming years.
A glorious future is always waiting for you. Be focused! Be disciplined!