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5 things to know how much risk you can take

Investments and risks go hand in hand. You give your hard-earned money to someone with an expectation that it will grow. That’s where the risk lies. What if the value of money depreciates? What if you lose all of it? What if the returns do not match the inflation rate? Here are 5 things you should ponder on while evaluating your risk appetite:

How much do you earn?

Don’t be misled. Your ability to invest doesn’t depend on your income. It determines your ability to diversify and tolerate risk. With several investment options available today, you can start investing with as less as Rs 100. If you are earning in six digits, you can invest in multiple options involving varying degrees of risk. So, if you do happen to lose money somewhere, there are chances it would be offset by a good performance of another financial instrument. That ways, you would not face a hand-to-mouth existence.

What are your spending habits?

It’s not your salary that makes you rich, it’s your spending habits. Even with a higher income, if you spend a large portion, you are left with little at the end of the month. Thus, you wouldn’t be able to invest in high-risk options. Because of a low disposable income, you are also exposed to the risk of uncertainty. Prioritise your expenses. Do not save what is left after spending, but spend what is left after saving.

What are your financial responsibilities?

Sahil, 28, has his parents to take care of. Nisha, 40, is a single mother of two teenagers. There are financial responsibilities in every individual’s life. Your risk appetite would vary depending on your age and responsibilities. If you are well-equipped to manage these goals, you would be able to take higher risks.

How long you want to stay invested?

Your investment strategy should depend on the duration of your goals. This is because it affects your risk-taking ability. You cannot take a high risk if you are looking to invest three months prior to, for instance, your daughter’s wedding. Planning for your retirement due in thirty years is a distant goal and so you have the flexibility to invest in risky options. With long-term goals, you have time in hand to correct and rebalance your plans to minimize the returns.

Are you emergency ready?

You are at high risk if you do not have sufficient money saved for emergencies. Say, you lose your job today, you should have enough money saved for the next six months. In case of a medical emergency, you should have a health insurance to take care of you/your family. Always have a life insurance, so that your family can pay off your debts and financial responsibilities after you.

As Warren Buffett says – “Risk comes from not knowing what you are doing.” When you take a calculated risk, you know what you are getting into and have a mitigation plan in place. Having information is never wasted. It puts you in a better place to evaluate and make informed decisions.