What is the best way to invest money? I got a lot of inquiries via email asking for suggestions to invest in a particular stock. I always ask them a question in return that what is your risk appetite and time horizon? So I thought let me share my own investment strategy with you all.
So in case you want to follow the same, you can do that easily. My investment strategy is completely safe and the risk-reward ratio is higher. Will discuss that in the latter part of this article.
What is the best way to invest money?
Well, there is No. thumb rule for the best way to invest money. Investment is a personal thing. Everyone’s investment theory is different. It is based on the below factors.
- Risk appetite
- your age
- Time horizon
- Personal traits
Risk Appetite
What I mean by risk appetite is the capacity of the individual person to let go of your invested money. Say for example I invest ₹ 100000 in HDFC Bank, then I know the chances of losing my money over the long run is very less.
Since the company has strong fundamentals and in such a business that is never going to end. But if I invest the same ₹ 100000 into any penny stocks then my risk of losing the money is much higher. So you must always invest in good quality stocks.
If you can’t decide by yourself, then you should invest in large-cap mutual funds instead of investing in the direct equity market.
I always invest in a quality stock after contemplating the risk vs reward ratio. If the reward ratio is higher than the risk ratio, then only I will invest my money into that particular stock.
Your age
In context to the above point, age is the major factor while deciding on the risk appetite. When I was 24 years old, just got my first job and want to catch the stars, my risk appetite was higher. This was mainly due to there was less responsibility on my shoulders.
Now I am 40 years old and there are family responsibilities, so obviously my risk appetite is lesser than that I had when I was 24 yers old.
Time Horizon
This one is also a major factor in investment strategy. I always do my investment keeping my future goals in mind. Say, for example, I will need 50 lakhs after 15 years for higher studies of my daughter. So here I know that I have 15 long years.
I will invest in large-cap stocks which gives stable returns over the longer run. These stocks will also give me dividends which are like icing on the cake.
I invest around 40% of my investment amount (corpus) into such stocks which will give me higher returns in the longer run.
Now you must be thinking, how to find such stocks? Well, there is no need to look far. You just check your surrounding and you will find many such companies.
For example, IT companies like TCS, Wipro, Infosys, etc. Look for the FMCG (daily product company) like Colgate, Hindustan Lever, Reliance group of companies, Tata group of companies, etc.
Personal Traits
This is nothing but the individual’s characteristic/discipline of taking decisions during the ups and downs of the market. When there is a bull in the stock market, your stock transactions are going in your favor and you started thinking that you are the king of the stock market.
But when the adverse situation comes (and definitely comes), you will realize your investment mistakes by paying a high price for that. So you will learn a lesson the hard way.
I have seen people becoming panic and selling all the good stocks along with the penny stocks under the bear market. Recently, during the Covid 19 Pandemic, I know some people who had sold all of their portfolios at one click of a button.
What do you call it? A panic situation where that person couldn’t stand the storm. This fear is a personal trait and no one can help you overcome this except yourself.
Best way to invest money – My method
| Strategy | Risk vs Reward | % of Portfolio | Horizon |
|---|---|---|---|
| Quality Stocks – Large-cap | 1:3 | 40% | Long |
| Momentum Stocks | 1:2 | 40% | Short |
| Debt Investment – PPF | 0:1 | 20% | Long |
Above is my investment strategy which I follow strictly. No matter what comes, I never go beyond this strategy. The best way to identify how many portions should go in what, you must first define the investment goals.
Investment Goals = Requirement of money in the future for certain needs.
It will become easy for you once you have decided on the investment goals. Divide all your investment amounts in the exact proportion of this strategy. This works for me pretty well, so I have decided to stick with this strategy only.
Remember, you must have discipline (personal trait), in investing. Otherwise no strategy will work for you.