With the Bombay Stock Exchange Sensitive Index or Sensex, continuing to oscillate due to the onset of the coronavirus in China and other global headwinds, investors would be wondering how to play this market. While the disciplined investor should take the systematic investment route, many would like to dabble in the stock market directly. There is more buzz now because the fortunes of mid-and small-cap indices, after two years of bad performance, are beginning to look up. However, remember that most investments
come with varying degree of risks, with equities
ranked right at the top. So, equity investors need to adopt a few strategies to reduce investment risk in their portfolios.
Don’t go lock, stock and barrel on equities:
With the Sensex close to 41,000 points and falling interest rate scenario, the urge will be to invest in stocks more aggressively. But it just might be a good idea to book some profits on equities
and invest more in debt or even sit on cash. This will ensure that the portfolio isn’t overexposed to equities.
Your own personal situation plays a big role. For example, a financial advisor would advise different allocation between debt and equity to a 25-year old and a 50-year old. In fact, the advice on allocation will differ for the same age group for a married person, those having children, as against an unmarried person. “In investing, divide and rule is better. Instead of embracing equities alone, diversify investments
across stocks, bonds, real estate, and so on. In times of volatility, when one asset class underperforms, the other holds up, thus reducing wealth erosion. A successful investment strategy demands proper asset allocations,” says Abhinav Angirish, founder, Investonline.in.
More stocks or mutual funds:
A concentrated portfolio in one or two stocks has a high potential of wealth erosion. In case of mutual funds, too, many chose to have only a few funds. “Diversification ensures you do not put all your eggs in one basket; the aim is to reduce risk. For example, within equities, investors should invest in a mix of large-cap stocks, mid-cap stocks, small-cap stocks, international securities and emerging markets.
Some portion should be in fixed-income securities, the money market, real estate investment trusts (REITs), gold funds and some government schemes. Do not build a portfolio using ultra-safe government schemes like PPF, NSCs and RBI bonds only,” says Ankit Agarwal, managing director, Alankit Ltd.
Yes, a good stock will be expensive. But the question is, how expensive? So, if you are investing indirectly in stocks, you need to do your homework well. The stock market can punish people who take investment calls through tips from unreliable sources without doing their own research. In general, it is good to avoid stocks with high price-earnings multiples (P/E multiples) as it indicates that they are ruling at high valuations. “We can minimise our investment risk by staying away from stocks with high P/E ratios and unstable management,” Agarwal said.
Cost averaging is important, but only to an extent: With the help of rupee cost-averaging method, the cost at which you buy units of a stocks/mutual fund gets averaged out. So, basically, you get a higher number of the units/shares when the market is down, and when the market is up, you get a lower number of units or shares. Since the equity market remains volatile, reflecting the ups and downs of the economy, it becomes important to average out the units making your investment portfolio less risky. But if a stock, especially one without great fundamentals or management record, is on a free fall, don’t try this. “Systematic Investment Plans (SIP) help to mitigate the risk associated with volatility. SIPs help you to save part of your income and amass decent corpus in the long run. It is an ideal way to reach one’s investment goals,” says Angirish.
Evaluate and exit: The capital market and the situation with different asset classes are going through constant change. At times the asset allocation you did six months or a year ago might not work as per the current market situation. If you do not monitor your investment periodically, investment risks that did not exist at some point may creep into your portfolio. Therefore, it becomes important to keep an eye on your investment holdings and evaluate them periodically to assess whether there is a need for any change to get the allocation right according to your current risk tolerance.