Investing money has been the go-to way of building wealth for quite some time now. People who have actually understood the concept of growth and value investing have got the knack of it and have built empires but there is no denying the fact that Risk Factor is always associated with investments especially mutual funds. Although a probable risk has never stopped investors from making the investment; they always look out for ways which reduce the probability and impact of risk on their portfolio.
Here we are with 6 established ways of risk reduction from your portfolio;
- Asset allocation
This is one of the most critical things to keep in mind while making investments. Asset allocation plays a major role in how you are going to invest your money and what returns will that investment produce? Properly allocated assets can help you reap greater benefits and moreover reduce the risk from your portfolio considerably.
This will also let you understand how much exposure can you afford and are up to across various asset classes.
- Diversification level
This is the second most workable and efficient factor when it comes to risk management in investments. Having a diversified portfolio in itself is a risk reducer, to add to it there are factors which further enhance the efficiency in risk management. These are:
- Diversifying across market caps
This refers to investing in funds with varying market capitalizations. There are basically three categories to it- large-cap, mid-cap, and small-cap funds. the risk factor is highest in small-caps and lowest in large-caps. Depending on your risk appetite, you can make investments.
You can also hedge your funds by countering a high-risk one with a low-risk fund.
- Diversifying across regions
This one refers to diversifying your investments across different geographic regions. Investing in foreign funds is one thing that can be done which gives the investor an international exposure. You can also invest in fund-of-funds. 5-10% is considered an ideal investment in such funds in order to minimize the risk.
- Diversifying across sectors
This refers to making investments in different sectors of the market which in turn helps reduce the risk. Since the market follows cycles, there are a lot of sectors which remain unaffected during a major market low. Having investment across 3-4 different sectors serves the purpose.
- Real estate
RIET is the new Fixed deposit. The way fixed deposits have enjoyed popularity over the last few decades, REITs are gaining such popularity in today’s times. With the upcoming development in the real estate market and newer schemes being introduced, people are getting inclined towards them. one can invest in a commercial space with a minimum investment of Rs. 2 Lacs. This has actually revolutionized the way people used to treat Real Estate.
You can also invest in REITs and diversify your portfolio across the real estate as well.
- Debt funds
If you are a risk-averse investor and wish for stable and regular returns, debt funds are the best option. These funds are also best suitable for people who wish to invest in comparatively stable investment avenues for the time being due to current market valuations and then transfer the funds to more rewarding Equity funds once the markets stabilize. Going for a Debt fund with STP is the best deal in today’s time.
- Rupee cost averaging
Rupee cost averaging is a technique applied under the SIP way of investment in which the investor invests money at regular intervals for a fixed tenure. When investments are made in such a manner, the average cost of investments is reduced hence when the prices of the markets fluctuate, the overall and effect gets averaged out over the due course of time. Take this as investing Rs. 2,00,000 in one go as a lump sum investment or investing Rs. 10,000 per month for 20 months.
- Playing defensive
If the main goal of your investment is capital preservation while growing it, you should adopt a defensive approach. This is the case of both buying and selling funds. do not buy funds just because they are available at a really low price, do a proper background check and then decide. Also, in case of a market downfall, do not do panic selling. Be defensive and play safe.