Hello Readers!
While investing in mutual funds, generally investors look towards two objectives, first creating their wealth and second protecting their capital. Well, as investing in mutual funds is associated with certain kinds of risks, thus fulfilling both these objectives at the same time, becomes difficult.
Thus, investors prefer mostly focusing only on one objective while investing. The conservative investor may prefer a debt-laden portfolio, which is less susceptible to market fluctuations. While some investors look towards investing more in Equity mutual funds to create good wealth from their investment.
The risk that emanates from the different phases of saving and investment can be managed, along with creating wealth from your investment, only you need to know that when and how you can de-risk his investment portfolio!
Your Age And Income Status Matters!
How much risk is appropriate for your portfolio can easily be decided by your age and your income status.
There are three life stages from an economic perspective – Accumulation, Preservation, and Distribution phase. In the accumulation phase, the investor is young (the 20s, 30s, or the 40s), they have more earning and saving opportunities. That means investors in this phase can bear a good amount of risk in their portfolios. Thus, they can prefer investing in a portfolio more focused on Equity investments.
Then comes the preservation phase, in this phase investors should gradually start de-risking their portfolio since the drawdown period is nearing. Typically, those in their 50s should consider reducing equity exposures in a phased manner as they near retirement.
Finally, in the distribution phase, one start’s depending on his wealth created all his life to cater their daily needs, generally the retirement phase. It is recommended that when you retire your investment portfolio should carry less risk. Low risk in your portfolio will save it from market volatility. So, the focus is more on looking towards the stability of income while also working towards beating inflation.
Here are various ways that can help you de-risk your investment portfolio.
Asset Allocation Is A Way……
If you are looking towards de-risking your investment portfolio the best approach to do is reallocate your assets. While reallocating your assets make sure you are moving your asset from Equities to Debt instruments. So, you sell equity funds and reinvest them into debt funds. While such rebalancing helps you hit your target asset allocation mix, it also has tax implications. Capital gains over and above Rs 1 lakh in a year could attract taxes at 10% for equity funds.
If You Don’t Want To Pay Tax……
If you want to avoid such taxes, you could route new incremental investments into debt funds to reduce the overall equity exposure. For this strategy to work, however, the new investments must be relatively proportional to the shift you want to see.
Be Attentive While De-risking Your Portfolio……..
While you look towards reducing the risk from your portfolio, it is advisable, go slowly and steadily, and do end up doing it all in a flash. Either start withdrawing little redemption from equity or start investing little in debt funds.
In case when you retire, you have a good financial position where you do need your wealth created in equity funds, it is advisable that you can continue to have exposure to equity for the next few years.
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For any kind of query you can contact us at Shri Ashutosh Securities Pvt Ltd., we are here to help you in any way possible.
Happy Investing!
(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).