Investments are made depending on risk appetite which spreads across different life-stages. Conservative investors usually pick safer stocks. Whereas, experts or professionals manage portfolios to book profits and usually have a higher risk appetite. The investment portfolio is divided into 3 major phases of life, accumulation, preservation, and distribution stage. In the accumulation phase, you actively save from a long-term perspective. In the preservation stage, you ensure that you manage your high-risk portfolio for a smooth transition to the distribution stage. The distribution stage is when you ripe the benefits. Now let’s understand effective ways to de-risk your portfolio.
1. Reallocate the assets
You begin de-risking the portfolio when you get closer to achieving your long-term goals. Also, you can consider de-risking your portfolio if your investment portfolio is exposed to market volatility for a longer duration. The idea here is to balance the risky portfolios, not to completely withdraw all the stocks. Since equity funds are high-risk funds as compared to debt funds you can move your funds to debt funds.
2. Invest in bonds
Since investing in bonds delivers fixed returns, it is a far safer option than equities. While it is true that equity funds usually offer higher returns, shifting the funds to bonds is the best option if you intend to preserve the funds. Secondly, this is a far better option than selling the funds. Selling the funds and cashing out the same will have tax implications. Hence, transferring the funds to safer securities is the best thing to do.
3. Increase the liquidity
It is necessary to consider a stop-loss mark when you plan your investment portfolio. At the same time ensure you keep the liquidity high during the preservation stage. This way when the market falls beyond your stop-loss mark you can rearrange the portfolio and also manage to fall back on liquid funds.
4. Revise the portfolio within the asset class
Depending on the stocks that are performing you can shuffle them within the asset class. For instance, if your investment portfolio is spread across small-cap, mid-cap, and large-cap funds you can evaluate the funds that are performing/not performing and accordingly shuffle them within the asset class.
5. Duration of debt funds
If your investments are largely into long-term and medium-term debt funds, you can move them to short-term debt funds. Why so? Because if you are looking forward to de-risk your portfolio you intend to ensure that you enjoy the benefit by booking the profits shortly, not in the longer run. Hence, this move is essential when you are de-risking the portfolio to reap the benefits in a short period of time.
6. Stocks of the right companies
When you plan to begin with the de-risking process you will have to shuffle the existing stocks. So, conduct thorough research and choose those stocks of the companies that are rich in cash flow and low on debt. This reduces the overall risk of the investment portfolio.
So, these are some effective ways to de-risk your portfolio. If you have any doubts, please feel free to contact us.
