Making an investment decision is one of the most perplexing activities for an individual. With an array of options to choose from, taking the right investment decision is a matter of great pain and relief too. 

The first step towards making the investment decision would to understand one’s own risk appetite. 

What is a risk appetite and how does one define it? 

A risk appetite is the amount of uncertainty a person is willing to take to earn returns on his/her investments. A debt instrument gives a certain amount of fixed return but those returns are low in terms of percentile. The element of uncertainty is minimal and so is the return. On the other hand, an equity investment does not guarantee any returns and thereby has higher risk involved. But equities as an asset class also have historically given higher returns than any other asset class. 

Once the risk appetite has been defined go for creating a basket of investments. This is what is called as diversification of portfolio. The more your ability to take risks the more would be the probability of earning higher returns. The basic investment rule of risk and return works everywhere. The higher the risks the better would be the returns. But that does not mean that one should go on to make a portfolio blindly. Investments must be followed with logic and historical facts. 

One way of doing this is to decide on the asset allocation for the entire investment amount. It would pragmatically mean that you decide how much is to be invested in which asset class. 

Different asset classes where investments can be made: 

Equities 

The highest in the risk scale is investments in equity. There are no guaranteed returns over any period of time. A good investor must do his/her own due diligence before investing into the stock.  

Some of the points that should always be covered are analysis of the kind of sector/industry the company is into, the quality of its management, the operational risks of the company, the study of its balance sheet and other public financial documents, the business model of the company, the P/E ratio, 52 week high low, current corporate announcement made by the company board, etc. 

Exposure to equities should be made with much prudence and if required help should be taken of professional equity investment managers who can guide you towards creating and excellent equity portfolio. The investment term or the lock-in period would play a major role on the kind of equities an investor should purchase. 
 

Debt instruments 

The least of the risky asset class, debt instruments offer pre determined fixed rate of returns on your investments. Examples would be the post office savings plan, national saving certificates, fixed deposits, infrastructure bonds, corporate bonds issued by triple AAA rated companies, commercial paper, discounted coupon bonds etc. 

Investments in debt instruments often carry the tax benefits also. Check out the actual rate of return after inculcating the tax benefits – you might be in for a surprise at times. 

Metals such as gold 

A new form of investments that has cropped up is the investments in metals like gold. Direct purchase of gold or investments through mutual funds is also possible. The liquidity of such investments is very high compared to equity or debt instruments. 
 

Real Estate 

The lock in period of investment in Real Estate is high when compared to other asset classes. The liquidity for such investments is low owing to the very nature on investments. The risk is high and so is the probability of returns.  

Invest only when you can sustain any cyclical downward movements because real estate is known to very scary at times because of its dependence on policy changes with respect land development. 
 
 

Market products like Mutual Funds, Insurance 

Investments into mutual funds are very enticing considering the expertise that mutual fund houses possess and the range of investment option that are available. As astute investor must first study various mutual fund schemes available in the market and then opt for a suitable scheme the investment objective of which is in line with the investor’s investment objective.

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