InvestorQ : What can an investor do in order to receive better returns without losing the entire investment?
Mahima Roy made post

What can an investor do in order to receive better returns without losing the entire investment?

Aditi Sharma answered.
1 year ago
Most government backed investment avenues are focused on providing capital protection rather than substantial returns. There are many high returns investment options available in India right now. But what one needs to understand while investing in these avenues is that there is a positive correlation between high returns and high risk. To understand this, it is important to understand what high returns mean. High returns= Risk free rate + risk premium. Where the risk-free rate is the interest an investor expects from an absolutely risk-free investment over a specified period of time. In this case, it is the yield given by the benchmark (10Y) government bond, i.e. 7.5%.

Risk premium is the return an asset earns over and above the risk-free rate. This is the compensation that an investor receives for enduring the risk associated with an investment. Higher the risk premium, higher is the return from an investment avenue. For example, an asset giving a return of 10% can be categorized as follows:10% = 7.5% + 2.5%. Where, 7.5% is the risk-free rate of return while 2.5% is the risk premium. You as an investor need to aware of your financial goals and risk appetite and make the appropriate choice. Additionally, there is no need to make a choice between investing in “safe” assets vs “risky “ones. If you diversify your portfolio and align it to your goals, you can very easily invest in both kinds of assets.

Just make sure that you understand the risky assets you are investing in. For eg -if you are investing in stocks, understand stock picking before doing so. Don’t base your decisions on random tips and recommendations of people. If you are unsure of directly investing in equity, you can invest through mutual funds or index funds. The more knowledge you have of high risk assets you are investing in, lower is the downside to investing.