Investment be it of any type carry a bit of risk with them if they provide with decent returns. Volatility and risk are unavoidable factors of the investment market. While long-term investments come up with outstanding returns, risk can be a driving force when it comes to short-term investments. If you stay risk-averse, the returns are going to decline significantly. Risk reduction can be done by taking care of a lot of things that affect your investment portfolio directly or indirectly. Here are a few ways by which you can reduce the risk from your investments;
- SIP and Rupee cost averaging
If you have still not heard of it, this is high time you learn about Rupee Cost Averaging and the SIP way of investments. Rupee cost averaging is one of the techniques behind SIP method which averages out the overall risk involved in that investment. It allows you to invest a certain amount of money at regular intervals and allows you to buy more shares when prices are less and lesser when the process is high. Similarly, it allows you to sell when prices and high and hold when low.
- Appropriate asset allocation
The next in line is allocating your assets as per your financial needs. Based on the size of your family, financial condition, age and risk tolerance, you need to allocate the funds in different assets. To maintain a balance between your funds and investments, you must visit your portfolio at regular intervals to check if the allocated assets are in alignment with your ultimate financial goal.
- Geographical Diversification
Making investments across different regions nationally and internationally gives exposure to geographical benefits. This will empower you with hedging the currency risk in India or your respective country. If not more, you can start with 5-10% investment in a foreign fund-of-fund to try out foreign markets.
- Sectoral diversification
Sectoral diversification means spreading your funds across different sectors of the investment market. It is advisable to have an exposure around 2 or 3 sectors across the market to spread out the risks. However, do not invest too much across different sectors might increase the risk. If any sector does not perform well, your investments get safeguarded with due returns from other sectors.
- Size diversification
Another form of diversification is across the capping of funds. The funds are available in three different sizes, large cap. Mid-cap and small-cap funds. the selection of funds depending upon your risk profile and funds available at disposal. Large-cap funds come with the least risk and small cap with the largest risk. A combination of these funds will provide risk cushion and greater returns.
REITs allow you to invest in the real estate market with a minimum investment of Rs. 2,00,000. If you do not have a lump sum amount to invest in the real estate, you can go for REIT (Real Estate Investment Trust). This also keeps your money liquid by allowing a bare minimum investment.
- Debt funds
Debt funds are the first choice of investors who are a little risk averse and are ok with moderate returns. These are best-suited avenues for people who think the markets are too high in equity funds and are waiting for a market correction to take place.
- Invest only the money you know you can afford to lose
Till the time you are not sure of the investment avenue and its return profile, the act of selecting the right funds is called speculation. While speculation involves high risk, put only that money at stake which you know you can afford to lose.
- Reinvest your dividends
We read about rupee cost averaging in SIP, another phenomenon which works in the background with SIPs is the Power of compounding. While you earn dividends on your investments, reinvest them with the principal amount for the next year and earn greater returns. This will be beneficial in rupee cost averaging as well while taking care of the inflation heat.
- Take expert advice
It is always good to take expert advice. an expert is always better researched about the market and has a good hold of the do’s and don’ts. He/she would be better able to gauge the risk you can afford and make investment suggestions accordingly; try piggy premier.