Risks and the Stock Markets - Part 6 of 7

Here are the strategies for the various options you identify yourself with:
• Max profit of Rs. 10/- and max loss of Rs. 10/-
o Invest in an index linked mutual fund or an index ETF which gives you 10% returns and inflation reduces your value by 10%
o Net effect money’s value has neither increased nor reduced
o Disadvantage – you’ll never be able to keep pace with the loss in value of money

• Max profit of Rs. 20/- and max loss of Rs. 10/-
o Equity mutual funds (over 3 – 5 year periods) will give a return of 20% pa and inflation will reduce your money value by 10% pa
o This is a FAR BETTER option than PPF, FDs and endowment or money back insurance policies

• Max profit of Rs. 50/- and max loss of Rs. 50/-
o Large market cap stocks which are less impacted by macro and micro economic factors (E.g. FMCG stocks like ITC, HUL – we’ll not stop using toothpaste even if the dollar crashes, petrol becomes unaffordable )
o One needs to have some investment in these companies

• Max profit of Rs. 100/- and max loss of Rs. 100/-
o Penny stock, small market cap stocks (they rise, crash and most of the times vanish!!)
o Don’t get into these stocks
o People with very HIGH risk appetite should try

• Max profit of Rs. 200/- and max loss of Rs. 100/-
o Multi baggers like Hero Honda, Infosys and AirTel [I bought AirTel in 2002 @ Rs. 16, today the price is Rs. 744/- (price adjusted for stock split)]
o Current market provides many a opportunities of companies which will be “Blue Chip’ firms of tomorrow.

The next important rule is to split your Rs. 100 / Rs. 1,00,000/- in a mix and match of the above options. This is called portfolio diversification.

All options linked to the market should be looked as investments for atleast a 3+ year horizon.