Managing Risk related with Equity
Warren Buffett, the most successful investor in the world, shared two of the most important rules of investing –
Rule 1- Don’t lose money.
Rule 2- Never forget Rule 1.
Managing or rather, mitigating risk is a necessary part of investing; it is a part of dynamics that influences our returns. The key lies in taking rational and well-thought decisions. You should take risks in accordance with the demands of a fund and your goals. For instance, if you would like to have access to cash immediately, then you can keep them in banks or better still, invest in liquid funds. If you are desirous of benefiting from the compounding feature of money and would like to keep your money invested for a long-term, it is preferable to opt for equity.
You can manage the risk factor by sound allocation of funds. You can utilize the strategy depending on your risk appetite- conservative, moderate or aggressive. Here are ways to manage risk while investing:
- Diversification – To mitigate risk, it is important to diversify your investment component into various fund categories, schemes, instruments etc. Smart diversification does not depend merely on the number of assets in a portfolio but also to the extent, in which these investments reinforce, counterbalance or act contradictorily in response to economic events. To optimize effectively, you need to review your investment portfolio regularly.
- Past performance and trend behavior – Past performance of the fund is a good way to observe the trend of the fund’s performance in future. Of course, it is not a guarantee that just because a fund outperformed in the past, it would do so in the future, as well. But having said that, it is still an important criterion while choosing a mutual fund. It is recommended to get in touch with your financial advisor and assess your risk appetite before making an investment.
- Evaluate your risk taking ability – An aggressive investor is someone who is fine with 70 to 80% exposure in equity class while a moderate investor is the one who can take a 50-50% or a 60-40% exposure in equity. A conservative investor is the one who is more concerned about the safety of his invested amount and can let go 20 to 30% exposure to equity or risk component.
- SIP – You can reduce market volatility and build a huge corpus over a long period of time through the mode of SIP (Systematic Investment Planning). SIP reduces risk by Rupee Cost Averaging; it can be started with little amounts of money every month. Further, you do not need to time the market. SIP also helps cultivate a disciplined approach of building a wealth stream.
- Protecting the downside – If there is a death of the bread winner in the family, all investments and savings towards various goals get impacted. That is why, it is important to have a basic term plan if you have dependents or loans to pay. Apart from term cover, one should maintain 3 or 6 times the monthly expenses in liquid or cash form so that you can take care of emergencies like job loss or such other things that could affect your investment goals.