3 effective steps to reduce portfolio risk

Investing in the financial market is a proven way to increase your wealth. Historical evidence suggests that financial assets such as stocks, bonds, MFs, equity-traded funds, etc. can give smart 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 also plummet. There are a host of risks in the market. There are business risks such as mergers & acquisitions that can influence the value of a stock. Likewise, economic parameters including rates and inflation can heavily impact the market. Political events and geopolitical tensions are also very risky, as their ill effects reverberate across markets and industries and result in stymied growth. At a time when the overall risk appetite has moderated, 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 contain risks and render elevated ROIs. Portfolio Investment: Instead of putting all the eggs in one basket, it is essential to diversify your investment as it can contain risk to a good extent. One should diversify investment across assets as well as industries. Asset diversification will include investing in numerous categories such as securities, bonds, crypto, mutual funds, etc. rather than pouring the entire amount into a single asset. When markets are bullish, it is natural to bet big on a single asset type. However, such an approach is not risk-proof. For instance, the crypto market is booming currently. Yet, the future of crypto is still uncertain and hence it is not advisable to pour in the entire capital. Rather alongside crypto, one should also invest in another low/ moderate risk investments such as REITs, treasury bills, bonds, etc. This can optimize risk without compromising much on the investment potential.Within an asset type, one should invest in various industries to delimit risk. This is an optimal approach. For instance, presently the rise in cement prices might weigh on the realty sector. Meanwhile, the stock will be bullish backed by heightened demand. Averaging Portfolio or Cost Averaging: This might not give the best returns but can reduce risk and ensure peace of mind to the investors. In this approach, a fixed amount is invested across each time interval irrespective of the market condition. For instance, if someone has INR 50,000 at their disposal, then rather than investing the entire amount, one would invest INR 5,000 each month for the next 10 months. There would not be any scope for emotional decisions, irrespective of the market conditions. If the market is on an upswing, then the investor will purchase fewer stocks. If the market is declining, then a higher number of stocks. Such an approach is relatively more affordable and can reduce market volatility. Market Pundits believe that it is a systematic and disciplined approach. Generally, the SIP investment is based on the same. Evaluate your Risk Appetite: The financial markets are a great way to create wealth. However, the perspective remains unchallenged that the markets are not devoid of risk. It is critical for investors to understand how much risk they can take. Evaluating one’s risk potential at the beginning can be beneficial in outlining an effective roadmap for investment. One should consider important parameters such as disposable income, savings, long-term goals, and responsibilities to access their risk appetite. Similarly, it is advisable to get some first-hand exposure to the market before committing a huge capital. (By Manoj Dalmia, Founder and Director, Proficient Equities Private Ltd)