3 Easy Tips to decrease Investment Risk

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Investment for many is now a part of their lifestyle. Knowing Investments are risky, people understand its necessary to fulfill their needs such as child’s education, Children’s marriage, retirement needs, purchase a house or some luxury car, emergency fund, travel fund, any special purpose fund, etc. The problem is that people mostly don’t even understand the inherent risk in what they are investing in unless they face losses. IL&FS, Franklin Templeton debt schemes, PMC bank deposits, Yes Bank deposits, etc. are a few such examples. 

Financial Markets these days offer various investment products according to various investment needs of the investor ranging from Debt securities, Equities, Gold Investment via mutual funds specializing in debt, equity or hybrid, SIPs, ETF, Gold, etc. all of which carry different kinds of risk. While we can not control the market risk which is caused due to several macroeconomic factors, we still can manage other kinds of risk. Following are some of the ways to reduce our investment risk: 

1. Decision backed by Research 

It is very important to do a good amount of research on the product and the current market conditions before making an investment decision. For example, In the case of investing in a stock one must check PE ratio, earnings growth, management team, and then compare it with other stocks in the same industry on the same parameters. Only after determining the amount of risk involved in each case should the decision be taken to invest in any asset. Most investors just trade speculative news based tips to make decisions on their hard-earned money, only to lose it in their gamble.

2. Asset Allocation 

Out of the total Wealth of an individual, different amounts of funds should be allocated to various assets so as to maintain a balance between investment in Debt, Gold, Property and Equity funds. Investing in both has its own Pros and Cons. For an investor who starts investing early, investing in equities offering higher returns over a long duration of investment would mitigate volatility and inflation risk whereas, debt instruments like bonds have high inflation risk over time and are susceptible to interest fluctuations. 

3. Diverse Portfolio 

It is very important to have a diverse sub-allocation portfolio covering all assets such as Property, Gold, Debt funds & Equity. i.e. While investing in Property money should be re-diversified into commercial, warehousing & industrial for a spread of rental income and market fluctuations. Likewise while investing in Debt one can consider using conservative debt like liquid funds, short & medium terms corporate funds, and long term government based debt for diversification of risk and return.

PS – If a person doesn’t have the time to carry the above steps, hiring an expert to manage your hard-earned money is a good option. One should always keep in mind that one small mistake can sometimes jeopardize their entire financial planning and future. Hence, where there is a time, knowledge, or confidence constraint an expert should be consulted. Lastly, investing in your own education to learn money is the safest and cheapest way to ensure you are decreasing your Investment risks.