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Investment Strategy: If you have the appetite for risk...

Some good options if you have a high-risk appetite

Everybody should start their financial planning as early as possible in life. There are many facets of financial planning. These include inflow and outflow of money, planning for increase in income and expenditures, saving for future needs etc. Keeping track of inflows and outflows of money helps in maintaining financial discipline.

People save a percentage of their inflows to cater their future needs - investments. There are many investment instruments available in the market and it's important for investors to understand the various offerings, requirements, and limitations of an instrument, before entering into it. Some of these investment instruments (equity or market based) offer much higher returns than traditional instruments. However, investing in these instruments is risky as they do not guarantee the principal amount. Since the future needs are also variable in nature (some known and others unknown), it is better to create a portfolio of investment instruments by investing in multiple options.

First of all, a first-time investor should understand his risk profile. The risk profile of an investor depends on various factors such as age, earning visibility, family background, earning members in the family, number of dependents in the family etc. Basically, it is the ability to bear a partial loss of the principal amount in bad market conditions, such as the current market conditions. The risk profile of an investor is unique to him. Also, the risk profile keeps changing as and when these factors change with time.

Here are some instruments an investor with a higher risk profile can include in his portfolio:

Equity

Historically, it is proven that equity investments give higher returns than any other market instruments over the long term. However, the key to success in the stock markets is timing, patience and regular market tracking. There are large-cap (well-known) stocks, mid-cap stocks and small-cap stocks in the market. Investors with a high risk appetite can invest in mid-cap stocks that offer a higher risk-reward ratio.

Factors to watch before making investment decisions in them include financial track record of company, macroeconomic business outlook of the sector, management's track record and liquidity in the market. Investors should stay away from small cap stocks as the information available about these stocks is not much.

Small-cap and mid-cap funds

These mutual fund schemes focus on investments in small-cap and mid-cap stocks. Those who do not have the time to track the markets regularly or do not have good market knowledge can look at investing in these funds. Usually, in bad market conditions, these stocks under-perform their peers focused on large-cap stocks, but in good market conditions they do well. It is a good time to invest in such funds as the markets have corrected quite a bit over the last one year and the possibility of further downsides is limited.

Portfolio investment services

High net worth investors can choose from the portfolio investment services provided by many financial and brokerage houses. A fund manager of aggressive schemes invests in private equity and venture capital funds with a high risk-reward ratio.

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