Investing in the financial market is a proven way to grow your wealth. Historical evidence suggests that financial assets such as stocks, bonds, MFs, equity traded funds, etc. can generate intelligent returns.
However, it should be noted that financial assets are also subject to numerous risks. Reward and risk are an integral part of financial investing. If the value of an investment can go up, then it can go down.
There are a variety of risks in the market. There are business risks like mergers and acquisitions that can affect the value of a stock. Economic parameters such as interest rates and inflation can also have a strong impact on the market. Political events and geopolitical tensions are also very risky as their negative impact on markets and industries lingers and hampers growth.
At a time when general risk appetite has waned, it is important to adopt a prudent and risk-averse investment strategy. Here are some of the key facets of prudent portfolio management that can systematically mitigate risk and generate higher returns.
Portfolio investments: Rather than putting all your eggs in one basket, it is important to diversify your investment as it can contain risk to a good extent. One should diversify investments across both assets and industries.
Asset diversification involves investing in numerous categories such as securities, bonds, crypto, mutual funds, etc., rather than putting the entire amount into a single asset. When markets are bullish, it’s natural to bet big on a single asset type. However, such an approach is not risk-proof. For example, the crypto market is currently booming. However, the future of crypto is still uncertain and hence it is not advisable to fill in the entire capital. Besides crypto, one should also invest in other low/moderate risk assets like REITs, treasury bills, bonds, etc. This can optimize risk without compromising investment potential too much.
Within one investment type, one should invest in different sectors in order to limit the risk. This is an optimal approach. The rise in cement prices could currently weigh on the real estate sector. In the meantime, the stock will be bullish, supported by increased demand.
Average portfolio or average cost: This may not bring the best returns, but it can reduce risk and provide security for investors.
With this approach, a fixed amount is invested in each time interval regardless of market conditions. For example, if someone has INR 50,000 to spend, then instead of investing the entire amount, they would invest INR 5,000 each month for the next 10 months. Regardless of market conditions, there would be no room for emotional decisions. When the market is booming, the investor buys fewer shares. If the market is down, then a higher number of shares.
Such an approach is relatively more affordable and can reduce market volatility. Market experts believe it is a systematic and disciplined approach. In general, SIP investment is based on the same.
Assess your risk tolerance: The financial markets are a great way to create wealth. What remains unchallenged, however, is the perspective that the markets are not free of risks. It is important for investors to understand how much risk they can take. Assessing your risk potential at the outset can be helpful in outlining an effective investment roadmap. One should consider important parameters such as disposable income, savings, long-term goals, and responsibilities to access one’s risk appetite. Likewise, it is wise to study the market first-hand before committing any huge capital.
(By Manoj Dalmia, Founder and Director, Proficient Equities Private Ltd)
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