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Investment planning: Three steps to reduce portfolio risk

Long-term investors with good quality stocks should hold on to their portfolio and wait out the current storm in the markets

Those who have a very low equity allocation now have a good opportunity to raise their allocations. Moreover, it is important to be disciplined and not shy away from equities because the stock markets are falling.
Those who have a very low equity allocation now have a good opportunity to raise their allocations. Moreover, it is important to be disciplined and not shy away from equities because the stock markets are falling.

The equity markets witnessed a sharp sell-off on Thursday as the Russia-Ukraine standoff escalated into a full-blown war last week. The 30-share BSE Sensex lost 4.7% on Thursday, recovering some lost ground on Friday even as investors chose to move out of risky assets and go for a safe haven like gold. However, experts suggest that long-term investors with good quality stocks should hold on to their portfolio and wait out the current storm. Here are some investment strategies to lower the portfolio risk.

Build positions
For equity investors, there is no merit in selling shares in panic. Instead, they should utilise this phase and accumulate quality names on every significant fall. Amar Ambani, head, Institutional Equities, YES Securities, says the next 7-odd trading sessions will offer tremendous opportunity for the long-term investor. “Invest in good quality management in sunrise sectors,” he says.

Similarly, Naveen Kulkarni, chief investment officer, Axis Securities, says geopolitical events often effect short-term reactions as the dominant news flow leads to market volatility. “The volatility is here to stay for some time before we conclude a market direction. Focus on asset allocation and use this volatility to build long-term positions in quality large and mid-cap stocks as they become attractive after the recent correction and provide a good entry point,” he says.

For long-term investors who can ignore the short-term gyrations in the market, V K Vijayakumar, chief investment strategist, Geojit Financial Services, says there are buying opportunities in high-quality stocks that have corrected significantly. “Financials, IT and real estate stocks have the potential to bounce back smartly in a favourable environment,” he says.

Stick to asset allocation
Asset allocation helps in deciding how investors should allocate money across different assets such as equity, debt, gold, real estate, and cash, which will minimise volatility and maximise returns. Those who have a very low equity allocation now have a good opportunity to raise their allocations. Moreover, it is important to be disciplined and not shy away from equities because the stock markets are falling.

Sushil Jain, CEO, PersonalCFO.in, a wealth advisory firm, says as there is no major change in fundamentals, long-term investors should not be worried by short- term market volatility. “You should stick to your asset allocation based on your risk profiling and do the necessary changes. As the equity part in the portfolio has come down due to the fall in the markets, one should rebalance it. Investors should increase the equity part gradually in three or four phases,” he says.

Diversify your portfolio
A diversified portfolio consisting of quality stocks and mutual funds, corporate and government bonds and gold exchange traded funds can help an investor to weather the volatility. To meet regular cash flow needs, it is better to invest in liquid funds which are less volatile than other debt funds whose underlying securities have longer maturity periods and are subject to interest rate risks.

Experts also say one should invest in equity after factoring in emergency funds and short-term financial goals.

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First published on: 28-02-2022 at 00:01 IST