HomeInvestmentWant to reduce your investment risk? Follow these strategies
Want to reduce your investment risk? Follow these strategies
January 15, 2020
If you are a conservative investor, broadly the investment options for you are bank fixed deposits, recurring deposits, Post Office FDs and RDs, and National Pension System, among others. However, if you have an appetite for risk and can withstand volatility, you can look into direct equity trading, equity mutual funds (growth/sectoral), commodity, forex, and derivative trading.
With these types of investments, investors need to manage risk. Having said that, most investors who start investing in high-risk investment avenues, get carried away and make mistakes which put their investments at risk. Experts suggest with measured risk, one can get higher returns that can lead to wealth creation. Investors need to proceed with certain risk management strategies to mitigate losses when advancing to riskier investment options.
1. Choose your balance – Investment should be allocated across a mix of asset classes, to get the most out of it. It should have varying levels of risk-return trade-offs, which may not guarantee a profit every time, but it reduces the probability of wealth erosion. The three basic financial market instruments: equity, debt, and money market, has different risk-return trade-off.
i. Money market instruments are the most stable of the three, but it doesn’t have the potential to beat inflation by a large margin. ii. Bonds come after that which are subject to less risk and short-term price movements. However, in the long term, the returns are lower and vulnerable to erosion by inflation. iii. Equity, on the other hand, comes with the highest level of risk over the short term due to day-to-day volatility in the market. It is known to give higher returns in the long term, beating inflation.
With these three types of options available, balance your high-risk, medium-risk, and low-risk options.
2. Divide your investment – While allocating your investments across asset classes, it should be in line with your goals and risk appetite. Experts suggest investors should limit their exposure to a specific type of investment within an asset class. Hence, don’t orient equity investment to one company or sector, and invest in either large-cap, mid-cap, or small-cap stocks across high-growth sectors.
You can diversify your MF portfolio across various fund houses and schemes based on sector, market capitalisation, and theme, depending on your risk appetite and goals. Aim at building a diversified portfolio comprising with a mix of equity, debt, mutual funds, along with other assets such as gold, and real estate.
3. The right tool – Investing in equity means dealing with volatile market movements, hence, try to set aside a fixed monthly amount for equity investments. You can do so through Systematic Investment Planning (SIP). With SIP the market volatility is balances, for instance in a bull market you end up with fewer units for the given high prices, and in a bear market, you get more, given the lower prices.
Investing through SIP eliminates buying an overpriced stock that doesn’t fetch returns, and helps investors book profits in the long term.