With more powers come more responsibilities. Err... I meant to say, with more returns come more risks. Most new investors want to maximize their investment returns with minimal risk. But that is hardly possible. Instead, in this post I will talk about how you can increase your returns but buy taking more calculated risk. I say calculated risk because you will not take blind risk, but instead use a proper method to improve your chances of increasing your returns.

There are no shortcuts in life. So more returns are only possible if you can put adequate effort to learn some new skills. Here are the 7 levels in that order that I consider to be the best approach to improve returns while taking on some risk.

Level 1: Find ways to increase investments

This seems like a stupidly simple advice. But you have no idea how little effort people put in this step. A lot of gains happen here with absolutely no risk. You need to constantly find ways to reduce your expenses. Figure out where you are unnecessarily spending money and cut it. Once you cut a recurring expense, you save the extra money every month for life. Alternatively you can find ways to earn more. May be find a second job or another source of income. This is not an easy task for most, but some people with special skills can do it.

Level 2: Don't miss your investments

Next, you should be consistent with your investments. Some have a habit of investing when market is down by a certain percent etc. But sometimes, the market can keep going up and you will not be able to enter. The best way to break the behavior is to setup an SIP where a certain amount of money is automatically invested every month (or whatever frequency you choose). Again, it sounds simple, but people miss out on this simple step. They may forget to invest or may not invest the amount they planned every month etc. Of course SIP is not required if you are consistent and never miss an investment. Whether you think market is high or low, just keep investing. Keep your emotions in check.

Level 3: Stick to your asset allocation

Most spend too much time trying to find the best mutual fund for a mere 1 or 2% more returns. But did you know that asset allocation actually gives you more bang for buck? Figure out what asset allocation you like, for example I prefer 70:30 allocation for a retirement goal. For other goals, you need to change the asset allocation as required. To learn how to change asset allocation depending on your goal, check out goal based investing article. Then stick to the asset allocation. What I mean is that you need to re-balance your asset allocation when the ratio changes by more than 5%. This is one of the best way to make good returns.

Level 4: Time the market

This is the first level that really takes on some risk for a possible better return. Timing the market is not something that one should attempt unless you have done some homework. You need to at least understand market cycles and macro-economics. Read books, blogs, watch videos or whatever it takes to understand the market cycles. For example you can start with Mastering The Market Cycle. Nobody can tell you exactly when the market is at the highest point or the lowest point. So you will have to form your own opinion of the market.

Finally, if you think the markets are over bought, you can start moving some equity to debt. Basically you need to modify your asset allocation based on market condition. As you can see, this is adding more variables to your goals. The duration of the goal and the market cycle should inform you of your preferred asset allocation. I am at this level currently. But I would not recommend this level unless you have the time and energy to read the markets. Very little skill is required at this level. It has more to do with common sense and a lot of reading and understand markets and economy at a high level.

Level 5: Invest in sectoral funds

The next level is to invest in sectoral funds. What this means is that in addition to the market cycle, you will also have to know which sector will move faster than general market. For example, when COVID-19 struck the economy, it is quite an easy guess that pharma stocks will pickup because everyone wants a vaccine. If you bought a basket of pharma companies using a pharma thematic mutual fund, you could have made a cool profit. For example, if you had invested in Mirae Asset Healthcare Fund via SIP in the last 1 year, you would have made 70% profit. Where as the best multicap fund gave only 30% during that same time at the time of writing this article.

If you have the right skills and follow sectors and current affairs, you can try your luck at sectoral funds. Of course figuring out which sector will move up and down is even more difficult to figure out than market cycles. You need to have a lot of confidence in your assessment.

Level 6: Investing in stocks

If you like reading annual reports of companies and can make models like DCF to predict intrinsic value then you can try investing directly in stocks. This level of investing is extremely difficult. Finding intrinsic value of a company is not an easy task. You need to predict the growth of the company, understand the moat and competition, check to make sure books are not cooked, have trust in the management and then have to find a margin of safety before investing. If you are at this level, you are an elite in the world of investing.

Level 7: Special cases

There are some other special cases where people had luck investing. For example IPOs (Initial Public Offering), derivatives, contrarian bets, bitcoin etc. I don't actually consider this as skill. It is more about luck than skill. I will leave it at that. No further comment.


There you have it. The increasing levels of risk and possible better returns. As you go up each level, the effort and skill required goes up exponentially. If you thought stock picking is easy, you are very wrong. If you can at least follow up to level 3 your will certainly make average returns and this is good enough for most people. Don't be greedy. But if you put some effort (level 4 and above) you can certainly make better than average returns. Your returns will be directly proportional to the amount of effort. Don't look for shortcuts with the promise of increased returns. Most likely what you get is more risk and nothing else.

Investing is not supposed to be easy. Anyone who finds it easy is stupid.

Charlie Munger