Risk Management

Good investors focus on what they can lose before thinking about what they can gain.

Key tools include position sizing, stop losses, diversification, and hedging.

The goal is not to avoid risk entirely but to take risks you understand and can afford.

In India, SEBI has introduced several risk management measures to protect retail investors. The peak margin framework ensures traders cannot take excessively leveraged positions. F&O lot sizes are periodically revised to keep minimum contract values around ₹5-10 Lakhs, preventing under-capitalized traders from entering derivatives. Despite these safeguards, SEBI data shows that over 90% of individual F&O traders lose money, highlighting that personal risk management is still essential.

A simple risk management framework for Indian investors has three layers. First, asset allocation, decide what percentage goes into equity, debt, gold, and cash based on your age and goals. Second, position sizing, no single stock should exceed 5-10% of your equity portfolio. Third, exit rules, set stop losses or GTT orders on Zerodha for every position so you know exactly when you will exit if things go wrong.

Many Indian retail investors skip risk management during bull markets because everything seems to be going up. The real test comes during corrections. Those who had clear rules in place during the 2020 COVID crash or the 2022 global sell-off preserved their capital and could buy quality stocks like Infosys, TCS, and HDFC Bank at deep discounts. Those who were over-leveraged or fully invested with no stop losses suffered drawdowns that took years to recover from.

Emotional discipline is a core part of risk management that no tool can fully replace. The urge to average down on a losing stock, to chase a stock making new highs, or to revenge-trade after a loss are all behavioural traps. Maintaining a written trading journal, noting your entry reason, stop loss, and target for every trade, forces you to think clearly and reduces impulsive decisions.