How to Protect Your Investments: 5 Proven Strategies to Avoid Losing Money

It's simple - Don't be ignorant or greedy.

Don't invest in products you don't understand or that may not be suitable for your investment needs and timelines.

Meet Govind, a 35-year-old software engineer who heard from colleagues about a cryptocurrency that had risen 300% in three months. Without researching or understanding how cryptocurrencies work, he invested ₹ 5 lacs in 2021. Within two months, the value crashed by 80%, and he lost ₹ four lacs of his hard-earned money.

Compare this with his colleague Meena, who invested the same ₹5 lacs in a diversified portfolio of equity mutual funds, government bonds, and a small amount of gold after researching each option. When the market experienced turbulence, her portfolio temporarily dipped by only 12% before recovering.

It is human nature to want the highest return possible, and most people think they can beat the stock market in the short term. However, return is just one of the factors you need to consider while selecting an investment portfolio.

Equally important is how comfortable you are with market fluctuations, your requirements for regular income versus capital growth, and your investment time frame.

Before investing, first determine your objectives for investing money. Here are some of them:

Regular income: If you want to earn income on a regular basis from your investments, you should consider investing more in assets that have low volatility. The returns may be lower, but your capital will be safe, and you will be assured a regular income, which will meet your objective.

Capital growth: Capital can grow significantly if you invest for a long-term duration. Therefore, investing in growth assets like equity or real estate is recommended. These assets can deliver high returns if you hold them long-term.

Income and growth: If you require income but want to grow your wealth as well (usually a requirement of retired people), then a combination of income and growth assets is recommended.

You should decide the asset category only when you know your financial objectives.

How to Protect Your Investments? Here are some additional ways to not lose money:

• Don't buy any products you don't understand.

A smooth-talking agent persuaded the Joshi family to invest ₹10 lacs in a structured product that promised "guaranteed returns with market-linked growth." They didn't understand the complex fee structure and exit penalties. When they needed money after 3 years, they discovered their investment was worth only ₹8.5 lacs after all the hidden charges.

• Don't buy something just because your friend bought it.

Rajiv's friend Prakash made good money investing in shares of a pharmaceutical company and encouraged Rajiv to do the same. Rajiv invested ₹3 lacs in the same company without doing his research. Unlike Prakash, who bought at a low price, Rajiv bought when the stock was overvalued. The stock price fell 25% in the following months, teaching Rajiv an expensive lesson about following others blindly.

• Don't invest blindly based on tips from TV anchors.

Meera watched a financial news channel where an analyst enthusiastically recommended a small-cap stock, calling it a "once-in-a-lifetime opportunity." She immediately invested ₹ two lacs. Six months later, the stock had fallen 40% amid revelations of accounting irregularities. The TV analyst had moved on to recommending other stocks, taking no responsibility for his previous recommendations.

• Never buy insurance as a form of investment.

Ajay, a 28-year-old professional, bought a ULIP (Unit Linked Insurance Plan) that required him to pay ₹1 lac annually for 15 years. The agent promised high returns plus life insurance cover. After 5 years, when Ajay checked his policy value, he was shocked to discover it was worth only ₹3.8 lacs despite having paid ₹ five lacs in premiums. High administrative charges, fund management fees, and premium allocation charges had eaten into his returns.

• Have a diversified portfolio.

The Meera family invested their entire savings of ₹30 lacs in real estate, buying a second property for investment. When property prices in their area stagnated for 8 years and they needed money for their daughter's education, they couldn't sell quickly and had to take an expensive education loan. Had they diversified across asset classes, they could have easily liquidated some investments without stress.

Most importantly, don't buy something without understanding it completely and doing your research. Get a second opinion.