Protect your investment portfolio from market shocks

Since investment is subject to individual needs and requirements, there can’t be a single approach; rather, there should be many roads leading to a single goal.

Ever wondered if there is a way to guarantee success through investments? Which is the best asset class or asset mix to have? Investing is a systematic approach towards creating wealth, if practised on a regular basis. The approach doesn’t stop here; the money invested needs to go into appropriate asset classes, which should suit one’s risk appetite to optimise risk-adjusted returns.

Since investment is subject to individual needs and requirements, there can’t be a single approach; rather, there should be many roads leading to a single goal. Some basic principles, if kept in mind, can bring substantial growth to one’s wealth.

Power your wealth with a multiplier effect by investing early

It is rightly said that the early bird catches the worm. An investment made early helps one to multiply wealth and create a higher corpus. This is brought about by the compounding effect over a period of time, in which returns start earning returns. Your money starts working for you rather than you working for your money.

Build your portfolio systematically by investing in mutual fund SIPs

The first step is usually confusing and difficult. Thus, it is ideal to start investments with a Systematic Investment Plan (SIP) of a mutual fund scheme. SIP is a form of continuous and regular investment in mutual funds, which in turn invest in equity markets. However, allocating money to a mutual fund scheme should be based on one’s risk appetite. The allocation can be towards large cap, mid and small cap, balanced and debt funds.

Don’t put all your eggs in one basket — diversify your portfolio

Knowing where to invest and how to divide your money into different asset classes is one of the most important skills. Effective diversification of investments will help reduce risk as well as enhance returns. However, the question is how to diversify and what are the different levels of diversification.

Diversify across different asset classes like equity, debt, gold

Scout within the available universe. For example, within equity, if you choose to invest in mutual funds then the same should be spread across categories like large cap, mid and small cap, balanced fund and arbitrage fund.

Diversify across different geographies to hold investments in different countries. These can either be through a structured investment platform or mutual funds.

It’s not just about generating returns, you should also protect your money

The golden rule for investment is: do not lose money. This is the first and the most important principle, so design your investment mix in such a way that it stays above the water and impact on your investments by a dip in markets or volatility will be minimal. In this way, your portfolio is safe from market shocks. It is believed that the best offense is a good defence.

While investing, one of the objectives is to earn higher returns, but risk level should not be compromised.

Look for asymmetric risk/reward

Higher the risk, higher the returns is the most commonly-followed perception in the investing world. However, the case is not so. Even within an asset class, returns can be optimised for the level of risk assumed and earn higher risk-adjusted returns. It is often said, “Be greedy when others are fearful”. This means buy when people are reluctant to invest. This is often seen when there is a huge correction in the market, leading to panic. In such a scenario, people choose to stay away from investing. In this state, investments are often available at a discounted price. Also, the SIP mode of investments in the equity market helps one to garner higher risk-adjusted returns since it ensures averaging of costs in the long term.

Tax efficient avenues

The key to earning higher returns lies in allocating investments smartly and in choosing tax efficient avenues.

(The writer is CEO and Founder, Right Horizons)