Market awareness and knowing your risk-taking capacity will help you invest more strategically.

Two planters Ibrahim (more experienced)and Krishna (new planter) sowed rose plants for the coming wedding season. Both hoped that in six months, the flowers would fetch them good money. However, due to excessive rains, both the farmer lost few plants in their garden. Two months later, Krishna came to know that lilacs are doing good business and accordingly, he uprooted a few rose plants to sow lilac seeds. In five weeks, its price fell and to mitigate the loss, Krishna uprooted lilacs to plants lilies, which were in vogue. Six months later, during the wedding season, Ibrahim, who stuck with the initial plan, had more roses to sell than Krishna. Moreover, when Krishna finished selling all his produce, Ibrahim sold the rest of his roses at a higher price.

What made the two farmer friends act differently? It’s their awareness about the market trends. Instead of focusing on the final goal, Krishna unnecessarily stressed himself becoming too conscious of short-term trends. Meanwhile, acting like a seasoned business person, Ibrahim thought more strategically.

Now, investors in the financial world don’t behave very differently. People with varied level of experiences in the markets behave differently while making investments. Even at times, we get to hear of investors visiting financial astrologers instead of analysts before making their investment plans. How scientific is the practice, however, is another subject of discussion. But, is it necessary to be too emotional over your investments?

Let’s understand:

Making the right investment choice is not an easy task. A lot of research, studies and self-discovery go into the process. First, you need to decide what kind of corpus you are looking at, at the end of the investment tenure. Second, what percentage of your income you can afford to invest in. Third, equating the two, you need to decide whether can opt for safer investment options or, need to act more aggressively. And even after all this, when you see your money going down, it is difficult to remain unfazed or unaffected. In the age of technology, where you can track your stocks and mutual funds at a tap, remaining unemotional is even more difficult.

How does a novice or a casual investor react when they see markets going down?  The immediate reaction would be to pull out all the money and put it somewhere safe or invest in something which is doing a little better, hoping to re-earn the lost amount.

However a more seasoned investor will stay put with his original investments. In fact, he might even invest some more money in the same investment, being aware that markets go down to grow back again. It is awareness about the market movements which helps the more experienced investor to think more rationally.

Financial literacy or awareness is, in fact, the first step of being more logical with your investments, especially the aggressive ones. But, there are other factors too. Most important of them is to be aware of your risk appetite and accordingly deciding the ratio of your safe investments like fixed deposits, PPF or government bonds etc. and the more aggressive ones like stocks and mutual funds.

If you have a higher risk appetite, you can put 75% of your money in aggressive assets and 25% in the safer ones. In case of medium risk attitude, the ratio should be 50:50 while for people with low risk appetite, the ideal ratio is again 75:25.

Another factor is- how much is percentage of your income you are taking the risk with? If the percentage is as high as 25 to 30%, obviously the emotional factor will be higher.

Here you need to find a balance.

People coming from a salaried income background are advised to invest up to 15% of their income into aggressive assets. Also, it is advisable to expose your money in the more aggressive markets in the initial period and play comparatively safer when you are nearing the maturity period.

For example, if you have planned a certain amount of corpus for your child’s higher education with a 15-year horizon- for the first 10 years you can invest into the stock markets but for the last five years, it is advised to look for safer options.  Moreover, it is also necessary to learn when to liquidate your stocks and mutual funds. For example, if your stocks or mutual funds are consistently doing bad, despite the markets showing good results, it is advisable to liquidate it immediately.

It is not wrong to be emotional with your hard-earned money but there is no need to stress unnecessarily. There are a number of ways to mitigate risk – a little bit of financial awareness and knowing your risk-taking capacity can help you grow your money 10x in no time. A sensible investor will always hold some gold, few fixed deposits and insurances, and also have some equity exposure. The proportion, however, depends on your risk-taking ability.