Focus On Managing Risks In Your Portfolio

One of the key challenges for investors is to ensure that they have adequate financial resources at different stages of their lives. While this can be achieved by following a goal-based investment process, investing early and maintaining the discipline of investing regularly as per their asset allocation, many investors don’t have the patience and perseverance to continue this process through their defined time horizons. Then, there are those who either invest very conservatively to protect their capital at all times or invest quite aggressively thinking it to be the right strategy for making extra-ordinary returns.[EasyDNNnews:PaidContentStart]

Needless to say, both these approaches expose investors to different types of risks. While ultra-conservative investors end up compromising on their long-term goals as their portfolios fail to keep pace with inflation, the aggressive investors often make irrational investment decisions in their pursuit for that ever-eluding financial windfall.

The key, therefore, is to have the right balance between risk and reward and invest in options that are Tax-efficient, liquid, flexible, transparent as well as offer professional money management. Asset allocation based on your time horizon, goals and risk-taking capacity is one such strategy that will keep the risk within your defined risk-taking ability. When it comes to choosing the right investment options, Mutual Funds score over others on most parameters. Of course, you need to choose the right funds.

In today’s complex financial environment, investing money judiciously is becoming more and more challenging. Therefore, it’s important to plan your investments as it allows you to allocate appropriate sums for your different goals.

Here’s what you need to do to keep your investments on track and enhance the chances of achieving your goals.

Begin with setting your goals - Defining goals i.e. short term, medium term and long-term is critical as it helps in directing the entire effort towards achieving them. Once the goals are established, you must assign a time horizon to each of these goals and quantify them. Simply put, by setting a target for each of the goals and assuming a rate of return based on the proposed asset allocation, you can work out the amount that needs to be invested to achieve these goals.

While starting the investment process early and in the right manner is important, it is equally important to monitor its progress. Therefore, it helps if you create a separate portfolio for each of the goals. This ensures total control over the goals and the progress made towards achieving them at all times.

Prioritize risk management - Ignoring risk management can be risky as you may not be able to do enough to cover risks relating to your life, health and property. Therefore, you must ensure that these risks are adequately covered. Remember, buying the right insurance policy is equally important. It is always advisable to separate insurance needs from investment needs.

Creating an emergency fund equivalent to your six to nine months' expenses is also a crucial part of risk management. This emergency fund ensures that the investment process is not disturbed when you are faced with the vagaries of life. It is equally important to ensure that the risk management process is systematically and periodically reviewed to further reduce the risk.

Remain committed to asset allocation - As is evident, goal-based investing can help a great deal in ensuring that you invest with a clear time horizon and avoid making abrupt changes in the portfolio. The asset allocation process, which is an integral part of your investment process, largely determines the level of risk and the likely returns from the portfolio.

Last but not the least, don’t make a mistake of underestimating risk and/or overestimating reward from your investments. You need to be careful about this aspect of investing. By acknowledging the risks associated with each of the investment options, you can improve the chances of building greater wealth.

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