Not knowing what the future holds can be unnerving. Any kind of uncertainty can be hard to deal with - emotional, physical,or financial. However, life is full of unexpected moments, and as long as youare prepared for them, you can come out pretty much unaffected.
There are severaltypes of risk in investment, too. Different asset classes(such asequity, debt, etc.) carry distinct levels of risk. Theseinvestment risks refer to fluctuations in returns due to macroeconomic factors, such as inflation, changing interest rates, market volatility, and others.
Thankfully, someinvestment risk management strategies can help you reduce the risk factor and earn favourable returns. Read on to find out more:
1. Do your research before you invest
Investing without knowledge and falling for scams can increaserisk. So, it is vital toconduct thorough research before picking an investment avenue. For example, while investing in equity, check the company’s growth, debt-to-equity ratio, etc., to analyse the company’s future growth. This can help you avoid pitfalls.
2. Invest only as per your risk appetite
Risk appetite refers to an investor’s ability to tolerate risk in investment. Your risk tolerance or appetite can depend on your age andfinancial goals. Usually, younger investors tend to be more risk-tolerant than olderones. If you are young, you can invest more in equity,which isa high-risk asset class. But if you are nearing retirement,try toinvest more in fixed-income assets as they are considered relatively low-risk.
3. Diversify your investment portfolio
Portfolio diversification is another usefulinvestment method to lower risk. According to this, youshould distribute your money in multiple investment options spread over different sectors, industries, asset classes, or market capitalisations. This way, you do not concentrate all theinvestment risk in one place. It is unlikely that the two investments will react to the market similarly. Even if one delivers a loss or a lower return, the other can help balance it out.IDFC FIRST Bank’s Mutual Funds can be suitablefor creatinga well-diversified portfolio.
4. Keep a long-term investment approach
Patience is critical for reducinginvestment risks. A long-term investment strategy can help you overrideshort-term market volatility. A long investment term is largely unaffected by short-term market highs and lows. Moreover, the more time you spend investing in the market, the more time your moneystands to benefit from thecompounding factor. This canadd up to higher gains at maturity.
5. Check your portfolio performance
Once you create a suitable portfolio, monitor its performance and conduct periodic reviews. You can review long-term investments once or twice a year. Avoid reviewing your portfolio too often, as you may end up making more changes than required, which can be counterproductive. For example, equity funds are more prone toshort term volatility.So, alter the portfolio only if the assets are not performing well for a longer duration.
Conclusion
Every investment comes with related risks. But the above-mentioned investment strategies can ensure an adequate balance betweeninvestment risks and returns.Above all, remember to select the right investment options -such asIDFC FIRST Bank’s Mutual Funds-to acquirea diversified portfolio that can deliver optimal returns.
Disclaimer
The contents of this article/infographic/picture/video are meant solely for information purposes. The contents are generic in nature and for informational purposes only. It is not a substitute for specific advice in your own circ*mstances. The information is subject to updation, completion, revision, verification and amendment and the same may change materially. The information is not intended for distribution or use by any person in any jurisdiction where such distribution or use would be contrary to law or regulation or would subject IDFC FIRST Bank or its affiliates to any licensing or registration requirements. IDFC FIRST Bank shall not be responsible for any direct/indirect loss or liability incurred by the reader for taking any financial decisions based on the contents and information mentioned. Please consult your financial advisor before making any financial decision.
FAQs
Investment methods to eliminate risk from your portfolio
- Do your research before you invest. Investing without knowledge and falling for scams can increase risk. ...
- Invest only as per your risk appetite. ...
- Diversify your investment portfolio. ...
- Keep a long-term investment approach. ...
- Check your portfolio performance.
Portfolio diversification is the process of selecting a variety of investments within each asset class, which can help those looking to reduce their investment risk.
How does a portfolio reduce risk? ›
Diversification doesn't seek to maximise returns but aims to lower the overall risk of an investment portfolio. For example, a concentrated, focused portfolio may deliver higher returns, whereas a diversified portfolio aims to reduce the impact of poor-performing assets and generate more consistent returns.
How to mitigate risk in a portfolio? ›
Risk Mitigation Strategies
Asset allocation and diversification are the most effective strategies to minimize financial risk. Allocating an investment portfolio to different asset categories by sector, industry, and region minimize financial risks.
How to de-risk an investment portfolio? ›
Diversification helps reduce specific risks because it minimizes exposure to any asset or sector. Asset allocation involves deciding how much of your portfolio should be allocated to different asset classes. Adjust your asset allocation according to your risk tolerance, financial goals, and investment horizon.
What is one way to minimize risk when investing? ›
If you feel there is too much stock market risk in your mix, one way to mitigate is by reducing the amount of stock and increasing the amount of bonds and short-term investments you own. Professional investment management is available at every price point (even free in some cases).
What are the 5 ways to reduce risk? ›
There are five basic techniques of risk management:
- Avoidance.
- Retention.
- Spreading.
- Loss Prevention and Reduction.
- Transfer (through Insurance and Contracts)
The basic methods for risk management—avoidance, retention, sharing, transferring, and loss prevention and reduction—can apply to all facets of an individual's life and can pay off in the long run. Here's a look at these five methods and how they can apply to the management of health risks.
What are the 5 risk management processes? ›
There are five basic steps that are taken to manage risk; these steps are referred to as the risk management process. It begins with identifying risks, goes on to analyze risks, then the risk is prioritized, a solution is implemented, and finally, the risk is monitored.
How do you manage portfolio at risk? ›
Hence, we bring you the top 7 strategies to manage your portfolio risk:
- Develop a Plan for Maximum Potential Loss.
- Focus on smart Asset Allocation.
- Ensure you have a margin of safety.
- Stay away from Portfolio Volatility.
- Prioritize Liquidity.
- Refrain from Emotional Thinking.
- Analyze your timelines.
Rebalance your portfolio
Your portfolio should match your appetite for risk. If the recent stock market volatility made you want to jump ship, you may consider revisiting your allocation. Equally important, you want to make sure your intended asset allocation matches your actual one.
How do I protect my portfolio? ›
Investors can preserve their capital by diversifying holdings over different asset classes and choosing assets that are non-correlating. Put options and stop-loss orders can stem the bleeding when the prices of your investments start to drop. Dividends buttress portfolios by increasing your overall return.
What are the 5 steps to mitigate risk? ›
The risk management process includes five steps: identify, analyze, evaluate, treat, and monitor. You can mitigate risks by avoiding, accepting, reducing, or transferring them.
What are the 4 ways to mitigate risk? ›
There are four common risk mitigation strategies: avoidance, reduction, transference, and acceptance.
How do you adjust portfolio risk? ›
- Know Your Risk Tolerance. ...
- Ensure Sufficient Liquidity in Your Portfolio. ...
- Implement an Asset Allocation Strategy and Stick to It. ...
- Diversify Your Investments. ...
- Periodically Monitor Your Portfolio's Performance. ...
- Focus on Time in Market (Instead of Timing the Market)
The cardinal rule of investing is: Protect and preserve your principal. Investors can preserve their capital by diversifying holdings over different asset classes and choosing assets that are non-correlating.
Can I manage my own investment portfolio? ›
You can manage your investment account on your own or hire a professional to handle the task for you. There are also automated portfolio management services, or robo-advisors, in industry parlance.
How to balance risk in a portfolio? ›
A good way to minimize risk is by creating a diversified and balanced portfolio with stocks, bonds, and cash that aligns with your short- and long-term goals. From there, you can broaden your portfolio to include other assets like real estate or high-risk investments for an increased likelihood of higher returns.
