How to choose the best investment category in the share market?

The primary reason for financial investment is wealth creation. Nowadays, there are many avenues like shares, mutual funds, exchange-traded funds (ETFs), among others, that provide investors with ways to build their wealth effectively.

Jun 02, 2018 05:06 IST India Infoline News Service

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The primary reason for financial investment is wealth creation. The primary reason for financial investment is wealth creation. Nowadays, there are many avenues like shares, mutual funds, exchange-traded funds (ETFs), among others, that provide investors with ways to build their wealth effectively. However, before choosing the appropriate category, an investor must be aware of the following:
  • Risk appetite
  • Investment type
Risk appetite:
 
Risk can be divided into five general categories:
 
1) Conservative investor
 
In this category, an investor is looking for investments that protect his/her capital while funding their daily expenses. Retired people primarily come under this category.
 
2) Moderate conservative investor
 
This category is similar to the conservative investor category. An investor of this category will try to invest as per market trends, but ultimately they will want to ensure their capital.
 
3) Moderate investor
 
These investors are the in middle lane of the investment category. They invest with a specific goal in mind and have a portfolio that fulfills their future financial requirements.
 
4) Moderate aggressive investor
 
The moderate aggressive investors are more open to risk to gain higher returns. They are ready for losses but also expect a profit to compensate that loss. Their end goal is to amass a substantial wealth from their investment.
 
5) Aggressive investors
 
As the name suggests, this type of investor is not cautious and is willing to take on risks and earn returns more than the market value in long-term. They invest in long-term investments to right their losses.
 
Investment type
 
Stock type is similar to investor categories, and the investor can choose the stock type that best suits his/her risk appetite.
 
1) Conservative
 
This category shies from any volatile investments like stocks and focuses on the cash, bonds or money market instruments that offer stable returns and loss of capital.
 
2) Moderate conservative
 
This category has a portfolio with increased exposure to fixed-income securities, cash, real estate and commodities. They mainly focus on income generating and low-risk investments.
 
3) Moderate
 
This category is a mixture of value and growth investments with a balanced risk and rewards portfolio. The diversified mutual funds and ETFs come under this category.
 
4) Moderate aggressive
 
This investment category focuses on high-risk investments with less room for growth or value investments.
 
5) Aggressive
 
Nondiversified sector mutual funds, ETFs, and small-cap stocks come under this group. This investment will be a mixture of growth, trending securities and speculative investments.
 
Other than this category, the investor also has to be aware of the following to choose their best investment option:
  • The investor has to do thorough and extensive research on the type of company he or she is willing to invest in.
  • It is always better to avoid the hype for results can be entirely different once the market settles down, the results can be entirely different.
  • An investor should not blindly go for cheap or expensive stock options. Before considering the purchase, they should know about the performance, growth, and the market value of the company.
  • Before investing, the client also has to know about the financial status of the company, its debt-equity ratio, dividend payments and other factors.
  • The investor should also be prepared for market volatility that’ll affect their portfolio.
  • While seeking a professional’s help is better when the investor is unable to conclude, nevertheless the investor must conduct his/her own research.
  • The investor should also have an exit plan in case of less dividend pay-out, price fluctuation, fall of stock rating and so on. Having a well-thought plan helps the investor avoid selling in panic when the market incurs a short-term change.

These are the criteria that an investor has to look out for when choosing the best investment option in the share market. By deciding under what criteria the investor comes in, they can choose the option of mutual funds, ETFs, stock trading, and other financial investments that align with their goals.

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