Investing comes with a degree of risk. Although the higher the risk, the greater the return, it is always advised to assess the risk. Invest smartly for the long-term rather than just relying on high returns. Let us understand the statement with an example.
Say A invests Rs 10,000 monthly in a high-risk, high-return potential investment scheme for the next 15 years. The return’s interest rate ‘promised’ is 15-16%. The corpus at the end of the term of the scheme will amount to somewhere between Rs 65 to 72 Lakh. B invests Rs 15,000 per month in a low-risk guaranteed investment scheme for the same term as A. The rate of return equates to 11-12%. The corpus at the end of the term of the scheme will amount to somewhere between Rs 68 to 75 Lakh.
Suppose, your financial goal is to accumulate Rs 75 Lakh. You have two options. Either invest in a high-risk, high-return strategy or take fewer risks, invest more capital, and not rely on high returns. You bring down the risk and achieve your financial goal by picking the second option.
Pick saving rate over high returns
The saving rate for a scheme refers to the amount you invest to achieve your financial goals. It determines the size of the corpus after the term ends rather than the interest rate; at least for the first few years of the investment. The goal of an investment is not about higher returns or taking more risks but rather having enough capital when you require it. When you choose the saving rate over the rate of return you increase the probability of achieving your financial goals greatly.
Conclusion
If your finances do not allow you to invest more than a specific sum of money for an investment plan, only then can you think about taking additional risks. Opting for higher returns should depend on your risk appetite. However, if you have the capital to make the right amount of investment periodically always pick the right saving rate over high returns.
For any clarifications/feedback on the topic, please contact the writer at sourabh.dubey@clear.in@clear.in
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