Maintain a diversified portfolio to handle risks in times of Covid

August 11, 2020 5:40 AM

Diversification reduces the overall risk portfolio especially if done right. There are certain equity and debt investments that are offering attractive opportunities when you look at them from the medium to long term outlook.

As the global economy plunged into an unprecedented recession, investors were forced to take losses (that was slightly abated by the measures taken up by the government) as the sheer impact was unexpected.

By Ashwin Patni

The Covid-19 pandemic has impacted our normal life and has forced most of us to reconsider our financial priorities and investment ideologies. In the first half of 2020 alone, we witnessed markets hitting an all-time high and also their lowest drop in decades. As such a situation is new to all of us, it is normal for investors to be confused when their hard-earned money is at stake.

Quality is your biggest asset

The defensive characteristics of quality investments were illustrated brilliantly this year. Investors who knew that they had invested in companies backed by quality management (who could also navigate their way to rebuild and emerge stronger) faced lower drawdowns from the market crash. In a world that was grappling with high uncertainty and major structural developments, quality investments supported investor portfolios on the way down. During the recovery, by virtue of their lower beta attributes they rose slower. However, on a net balance these stocks gave investors a better investment experience due to their lower volatility attributes.

Focus on medium-term outlook

As the global economy plunged into an unprecedented recession, investors were forced to take losses (that was slightly abated by the measures taken up by the government) as the sheer impact was unexpected. The recovery until now has been a ‘hope’ rally. Investors should however remain cautious and focus on the medium term outlook rather than the short term.

Investors must retain a long-term focus while investing in equities. Investors who believe in redeeming equity investments and pause their systematic investment plans may miss out on the opportunity to gain from ‘rupee cost averaging’ and the opportunity to top up portfolios at lower valuations. The bear cycle is unlikely to last forever.
Readjusting ‘risk’ potential

Investors need to accept that past performances are no longer a benchmark for returns in the future. Fear and panic may cause investors to take unexpected and hasty decisions with respect to their portfolios. It is important that we understand the available data, our respective incomes, goals, and the market volatility (since that will remain for some time now) and then re-evaluate risk. Furthermore, not all of us may be in the position to take the kind of risk we did a year ago.

Diversification is the solution

The best way to navigate through this risk is by diversifying. Shunning an asset class may not be the right way to go about. Diversification reduces the overall risk portfolio especially if done right. There are certain equity and debt investments that are offering attractive opportunities when you look at them from the medium to long term outlook.
Given the current environment, it is imperative that investors maintain discipline with respect to asset allocation and diversification.

In addition to these, the current environment has also bought back the importance of an emergency fund. The Covid-19 pandemic has acted like a reset button for the entire economy. Everything is being re-evaluated to adjust in a world that we are still not sure of. Fundamental investing principles may be refined (probably for the best) with investors who are more cautious and informed than ever of their financial priorities.

The writer is head, Products & Alternatives, Axis AMC

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