Each and every person is unique in themselves, and every investor has different needs and goals, likewise, every investor has a unique style of investing. It's not necessary that the best portfolio for one, will be best for others also, and this is mainly because every investor does not have the same risk tolerance capability.
There are investors who don’t bother if their portfolio gets down by 25-30% while others start panicking, even if their portfolio is down by just half a percent. There is a big difference between the investment profiles of low-risk profile investors and a high-risk profile investor. High-risk takers bet more portion of their investment in Funds, that are volatile towards market risk, whereas low-risk takers approach more low-risk funds and are conservative towards risk exposure on their portfolio.
Well, Risk-taking ability or risk-tolerance are two different things. Risk-taking capability depends on investors' age, financial status, goals, etc. while risk tolerance is simply, how investors react when their fund gives adverse effects. We all know that the main motto for investing in mutual funds is to earn good benefits, and in mutual funds, it is said: “more the risk, more are returns”. Here the question arises, how should investors with low-risk, invest in order to earn good benefits? What strategies should be followed by them?
There are smart strategies through which low-risk investors can invest and earn good return for their goals, if you are a low-risk profile holder, read and get to know the strategies to invest.
Strategy 1: Do Not Invest in Equity If You Can’t Digest the Market Volatility.
Some investors are much curious about their investment and have a habit of checking their investment portfolio returns 5 times a day. The problem doesn’t happen when you check your portfolio, again and again, rather disappointment occurs seeing the volatility in returns, due to market movements, in the portfolio of equity investors. Thus, investors who have a low-risk tolerance are advised to avoid investing in Equity mutual funds.
New investors who are young in age, and have started to invest early in their career, short-term volatility is not a big problem for their portfolio as they can reduce the effect of market volatility, by staying invested for the long-term. Thus, young investors, who are low risk-tolerant, must consider a multi-asset portfolio, that is they can part their fund to be invested and can invest one part in Equity and one part in Debt. Don’t worry your long-term investment horizon would take care of volatility problems, in your Equity Portion.
People do have a thought that why to invest in Debt mutual fund, if there are safe and traditional ways to invest for short-term goals of low-risk taking investors, like PPF (Public Provident Fund) and FD (Fixed deposit). Well, you need to remember that low-risk investments come with lower returns, and PPF and FD come with a lock-in period, and investors are liable to stay invested, till lock-in period overs. Well Debt mutual funds are the best alternatives for low-risk investors, as it doesn’t have any kind of lock-in period, are less risky as they invest in government securities and bonds, and also have short maturity period.
Therefore, as a low-risk appetite investor, choose the debt mutual funds, as they earn comparatively higher returns and they are volatile as well.
Strategy 2: Invest in Equity Fund with That Portion of Your Assets That You Do Not Worry About
Well if you have some extra cash, which is not in need of at least the next five years, then don’t store it idle in your bank account, better invest in Equity mutual funds. This can help you in several ways, the most important benefit is it will give diversification to your investment portfolio. Invest this extra cash via SIP (Systematic Investment Plan) mode, as it will give the benefits of Rupee Cost Averaging, which will ensure, that your portfolio gets more units when the market is low and fewer units when the market is low. Long term durations are best for averaging out your costs, minimizing the risk and maximizing returns.
One most important thing, you must not get scared with short-term volatilities in your Equity mutual funds, it's better to review your portfolio instead of reviewing your Equity fund. Review your portfolio and analyze, whether it is aligned with your goals or not, rebalance your portfolio according to your goals, this will help you keep the asset allocation in check and in your comfort zone.
Strategy 3: Have A Goal-Based Investing Approach
The very first advice that a financial planner give to its every investor, whether first-time or experienced, is, always invest in mutual funds with a fixed goal. You goal-based investments, help you to decide the investment tenure for your goal like short-term, medium-term and long term, and the investment tenure for your goals helps you decide the asset allocation for your investment. Like people with shot-term goals, should invest in Debt funds, investors with medium-term goals, can have a very small say around 10% exposure in Equity funds, and investor with long-term can have a high exposure say around 40-50% in equity funds.
Even though you are a low-risk profile investor, you need to calm down for your portion in Equity funds, as your long-term investment, will help to reduce the adverse effects of short-term market movements. As you get closer to achieving your long-term goal, you can start reducing your equity exposure.
As of now you must have understood how being a low-risk investor, you can earn good benefit, by following some smart investing strategies.
Most importantly, always consult a financial planner or advisor, before starting your investments. They will help you select the best fund, for your investments as per your requirement.
You can also contact us at Shri Ashutosh Securities Pvt Ltd., we are here to help you in any way possible.
(Mutual Fund investments are subject to market risk Illustrations are for example only, there is no guarantee of returns. Past performance is not an indicator/guarantee to future returns).