When you invest money in any enterprise, whether it is in stocks or mutual funds or by simply placing a bet, you just cannot avoid risk altogether. Every investment avenue is fraught with some risk.
If you try to eliminate risk altogether you will find that your investment does not yield any return. Therefore, the only thing that you do to earn profits is to take risks.
Another aspect is that the more risk you take the more the chances of you earning substantial returns on the investment and vice versa. However, at the same time it is also equally true that the more risky your investments the more the chances of you earning a loss on them. In other words, profitability or loss is directly proportional to the amount of risk you are prepared to take in your investments.
So, what should be your approach towards investing money? Whether you need to take blind risks in an effort to earn the most returns on your investment, knowing fully well that you may sustain a huge loss that way? Or you need to play entirely safe and then hardly raise any profits or loss on your investment? Both these extreme strategies are not recommended because you have limited capacity to undertake risks in your investments. That is true in the case of every person however rich he may be.
The best approach therefore while making investments of money is to take what is known as a calculated risk. This is known as managing risk in any sort of investment. Now what is known by a calculated risk? A calculated risk means taking only that amount of risk which is equal to the maximum loss that you can afford to sustain in a specific financial situation.
Every person's monetary situation is different and therefore every such person can take a different amount of calculated risk. Further, every person's monetary situation is all the time changing. However, every person in any situation can know exactly the state of his finances by proper analysis.
There is at least one strategy by which you can manage the risk in any set of investments. It is to diversify your investments. In other words do not put all your eggs in one basket because in case that basket breaks all your eggs will be lost.
What this means is to invest some of your money in stocks, some in mutual funds, and some in purely debt instruments such as fixed deposits. Every such investment carries a different amount of risk. That in equity carries more risk than in mutual funds and the risk in investing in fixed deposits is even less than in mutual funds.
The mix of this portfolio will depend on your financial situation. If you cannot afford to sustain a huge loss, you need to invest more money in debt instruments and less into equity. A rich person who can afford to sustain a bigger loss without appreciably denting his fiscal situation can invest more money in equity, less in mutual funds, and even less in fixed deposits.
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