0.6 Money before markets

Motivation

The most common way to lose money in markets is to put money there that you will need soon, or more than you can afford to lose, and then be forced to sell at the worst time. Sequencing your finances is not a moral lesson; it is a constraint on every later decision in this course.

0.6.1The order of operations#

The following are conventional rules of thumb, not regulations; adapt them to your circumstances.

Emergency fund. Three to six months of essential expenses in instruments you can access within a day without price risk (a savings account, a sweep-in deposit, a liquid fund). Size it to your job security and dependants.
Insurance. Pure term life insurance if anyone depends on your income; health insurance of your own (an employer's group cover ends when the job does). Insurance products sold as investments mix the two badly; keep them separate.
High-cost debt. Repaying a credit-card balance or a personal loan is a riskless return equal to its interest rate. Check your card's schedule of charges: no market return reliably beats revolving credit-card interest.
Goals with dates. Money needed within the next few years (a house deposit, school fees) does not belong in equities, whose falls of 15% to 60% in this chapter's Nifty table (0.3.3) took months to years to recover.
Only then: long-term investing, and only after that, a separate budget for active trading.

0.6.2Risk capacity and risk tolerance#

Risk capacity is your objective ability to bear losses: income stability, horizon, dependants, wealth relative to needs. A salaried 28-year-old with no dependants has more capacity than a 55-year-old who needs the money in three years.
Risk tolerance is your psychological willingness to bear them. Most people overstate it in a rising market.

Set your allocation by the lower of the two. A practical test: take the 2020 fall of the Nifty (38.4% from January to March, 0.3.3) and compute what it would do to your planned portfolio in rupees. If that number would make you sell, your equity allocation is too high.

0.6.3Asset allocation and a core–satellite structure#

Asset allocation is the split of your investable money among equity, debt and gold. It drives most of the variation in a diversified portfolio's outcome, and it is the decision you control. M14 · 14.1–14.5 gives the mathematics; here is a structure.

Core (most of the money): diversified, low-cost, rules-based. For example, index funds or ETFs bought by SIP, plus debt (bank deposits, G-secs, debt funds) and optionally gold, in proportions you fix in advance and rebalance once a year.
Satellite (a small, fixed share): your active stock picks and trading, run with a strict risk budget:
- The satellite's capital is fixed. Losses are not topped up from the core during the year.
- Risk per trade (the loss if the stop is hit, M03 · 3.1 calls it 1R) is a small fraction of the satellite, for a beginner 0.25%–1%.
- A drawdown limit: if the satellite falls by a preset fraction from its starting value, stop trading and review (M14 · 14.8).

Worked example 0.4

Monthly essential expenses are ₹80,000. Investable wealth after the emergency fund is ₹25 lakh.

Emergency fund: 6 × ₹80,000 = ₹4.8 lakh, held separately.
Core 85%: ₹21.25 lakh. Satellite 15%: ₹3.75 lakh.
Risk per trade 0.5% of the satellite: ₹1,875. A trade with an entry at ₹1,250 and a stop at ₹1,212.50 (3% below) risks ₹37.50 a share, so the position is $1{,}875/37.50 = 50$ shares (₹62,500).
Drawdown limit 20% of the satellite: ₹75,000. At a fixed ₹1,875 per trade, that is 40 consecutive full losses; at a fixed 0.5% of the current satellite, $\ln 0.8/\ln 0.995 = 44.5$ , so 45 losses. The rule is not expected to bind often; it exists for the case where your method does not work.

0.6.4How much to put into active trading: the base rate#

SEBI has studied the outcomes of individual traders directly. In every period it has studied, from FY22 to FY26, between about 88% and 93% of individual equity F&O traders lost money; in FY26 the figure was 87.7% after costs, with aggregate net losses of about ₹91,685 crore, most of them in options and in contracts on their expiry day. Among individual intraday traders in the cash segment in FY23, 71% lost money, and loss-makers paid costs equal to a further 57% of their trading losses (SEBI FY26 study and FY23 intraday study; M01 · 1.11 Case 1 has the full table, the primary press releases and the caveats on how the FY26 figures were obtained).

What this means for a learner:

The base rate is the prior. Before you have evidence of an edge (a tested process with enough trades, M04 · 4.4–4.6), assume you are in the losing majority.
Paper-trade first. The course's Simulator (0.8) costs nothing and records everything.
Size the first real-money budget as tuition: an amount whose total loss would change no plan in your life, inside the satellite of 0.6.3. Risk a small fixed fraction per trade; M03 · 3.7–3.9 shows how the probability of a deep drawdown grows with that fraction, and M05 · 5.10 explains why intraday costs make the base rate so bad.
F&O last. The losses are concentrated in options, and in contracts on their expiry day.