Risk, sounds cool doesn't it? If you have watched Scam 1992 you must have heard the dialogue "Risk hai to ishq hai". It loosely translates to if there is risk, there is love. Risk has been glorified and a lot of emotion has been attached to it.

When it comes to investing, risk refers to the possibility of losing the funds that you have invested. And there is a stigma around losing money which goes overboard and most people avoid taking any risk at all. Let me be clear, losing all your money without understanding what you are doing is definitely a bad thing.

Like everything in life, risk is both good and bad. Based on empirical analysis and hard facts, lets understand what is the best way to go about risk taking. We will try to understand risk in relation to the following; age, safety net, psychology and certainty.

Age: This should be a no brainer. If you are young and earning well, you can afford to and should take more risks with your money. You should invest in your friend's startup, in new emerging companies and risky opportunities. Ideally, you could afford to invest 50% of your funds. In fact, you should try to start your own business if you can save up.

Because when you are much older with a family, the cost of failure is quite high. At this age you should park your money in safer assets like bonds, good quality companies, well located real estate and so on.

Safety Net: If you happen to be lucky and have a well placed safety net i.e. an ivy league degree, wealthy family or got lucky then you too can afford to take more risks. Ideally, you can park 30 % - 50% of your money in high risk assets and the rest in safe assets.

Certainty: Not all opportunities are equal in this big world of ours. There are few high reward, low risk opportunities that pop up once in a while. Ideally, the more the certainty of the payoff, the smaller the reward, and the higher the uncertainty of the payoff, the bigger the reward. Nevertheless, this equation is not fixed. When you come across a low risk, big reward scenario just make sure that it isn't some sort of a scam. This brings us to psychology.

Psychology: Your emotional maturity (greed & fear) plays a big role in investment success. Believe it or not, the fact is that most of our decisions are emotionally driven. Our brain is so good at manipulating us into doing things that we feel the illusion of control. Emotional maturity comes with age and it is skill which one can learn and get better at, just like communication. Remember, as a baby you couldn't even utter Mama and now look at you blabbering endlessly. Many low risk, big return sort of investments are fraudulent schemes which are aimed towards the greed of people. If you are young and you come across something like this, ask for total transparency and verify everything. Most of the time, you will be surprised.

The next blog goes into more details about psychology.