Ways to reduce investment risk in your portfolio

CHENNAI: The coronavirus pandemic has taught us a lot about risks. Exigencies can happen anytime, so this is a good time to revisit your investment portfolio.

Wealth experts say, every investment is exposed to certain risk factors and the biggest mistake an investor makes is ignoring such risks.

Investment is largely dependent on equity, debt and cash. It also depends on many factors such as your age, risk tolerance, savings and financial goals. However, investors should look at a low-risk way of investing, say experts. 

The first way through which investors can reduce risk in their portfolio is by diversifying their investment portfolio across product types.

For instance, you can invest in different avenues like 30 per cent in the stock market, 20 per cent in mutual funds, 30 per cent in fixed deposits and 20 per cent in real estate.

So, if the stock price falls, your loss gets limited because 70 per cent of your investments are in other avenues. 

With the markets rising, the proportion of equity in the portfolio would have increased for most investors. In such a case, it is better to gradually reduce the overall allocation to equities. This will help in reducing risk in the portfolio. 

Thirdly, a new investor in a mutual fund should avoid investing money in a lump sum. In the current market scenario, if one invests a significant amount of money, then there is a risk of losing some amount if the market sees some correction. 

Lastly, as Chennai-based wealth manager K Krishna says — the golden rule for investment is that never chase returns blindly. One must always determine the extent of risk one can take while making any investments.

Maintain adequate liquidity

Experts advice that you must maintain around 6-12 months of  your expense money in a safe debt fund or a fixed deposit, which  is in liquid and accessible asset classes.