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Investing in the stock market is nothing short of a roller coaster ride. On the one hand, you enjoy the highs of earning greater inflation-adjusted returns with equity investments. On the other hand, you have to experience the lows of dramatic price changes and vulnerable portfolios.
Whatever your investment goals be, the market functions on the principles of risk-return trade-off. In short, to make more money, you need to take more risks. But, such a risky market can cause new investors to slip away from the market.
But it doesn't have to be that way. Here we bring you top investment strategies to minimise market volatility in your portfolio.
If you're new to investing, you've probably been given this way too many times already. This is because it is one of the simplest ways to control volatility, and it works. Focusing too much on one sector or company can increase your exposure to a volatile market.
In a diversified portfolio, you invest in a mix of various asset types (equity, debt and gold) and investment avenues (stocks, mutual funds, bonds, corporate fixed deposits) with varying risk levels to avoid being overexposed to a single sector or type of company. This can further be diversified into various international and domestic securities.
For instance, if you've only invested in one stock, and it falls by 10%, your entire portfolio will go down by 10%. This is why it is not uncommon for experienced investors to build portfolios with thousands of underlying securities across segments.
Instead of investing your entire savings in one equity option, it is better to invest smaller amounts regularly, spread out over various investment avenues. Because the idea is simple. The larger your investment, the higher will be the loss in case of a dip in the market.
For instance, if the market experiences an 8% crash at a given point and you've invested only Rs. 5000, your loss would be Rs. 400. However, in case if you have invested Rs. 5 lakhs in equities, your loss would amount to Rs. 40,000. That is why it becomes crucial to consider your financial goals and risk appetite before investing a large amount in one go.
When it comes to a volatile stock market, even the most experienced investors rethink their approach to minimise portfolio risk. So, if you're a beginner, it makes much more sense to pick a relatively safer route by investing in equity through MFs instead of individual stocks.
Since mutual funds are managed by professional fund managers under Asset Management Companies, you won't have to worry about tracking and analysing the market or your investment. From choosing the best funds to tracking its growth, the fund manager will do it all.
Moreover, mutual funds have various investors investing in the same fund and allow you to start with smaller investments. This way, the quantum of loss will be less and even further divided among the various fund holders. In fact, you can also take the SIP route to invest a fixed amount regularly and minimise your risk.
Hedging is a risk management tactic used to offset losses in investments by taking opposite positions in the market. It typically involves the use of financial instruments called derivatives, such as futures and options in your investment portfolio.
For instance, you buy a stock of a company hoping for a rise in the prices. However, you're also worried about the volatility in the industry. To protect yourself from a significant loss, you can buy a put option in the company, which is an agreement to sell the stock at a specified price at a later date. So, if the stock price ends up declining, you can offset it with the gains in the put option.
Thus, minimising your portfolio risk significantly.
Higher portfolio volatility can be detrimental to your investment goals as it can increase your level of risk and overwhelm even the most seasoned investors. At the same time, it is inevitable. So, as you begin your investment journey, do consider these easy strategies to minimise portfolio volatility and maximise your profits.
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Policies, Codes & Other Documents