Sunday, June 7, 2009

How to diversify portfolio to mitigat risk?

Investing is an important part of your overall financial planning. Due to the availability of many investment opportunities, investments require proper attention. Otherwise, a wrong decision may lead to some loss of the principal or the locking up of your money when it is actually required by you.

There are various investment options available, and investors should weigh them carefully before taking decisions. It is important to diversity the portfolio by investing in different investment instruments rather than keeping all the eggs in a one basket. Broadly, these are the various categories of investment instruments available in the market:

Equity and equitybased instruments


Investing in equity is good for investors with a moderate to high risk appetite. It is best to invest only your risk capital in equity, with a medium to long-term perspective . Currently, the stock markets have rallied almost 70 percent in the last three months. The market undertone is so bullish that they are moving almost in just one direction over the last few weeks.

Corrections in the markets are very short-lived and all categories of investors are chasing stocks. Analysts believe there is some improvement in the economic and political conditions here but many parameters are yet to stabilise from a macroeconomic point of view. Due to the sharp market run, the valuations of stocks have already gone up.

Investors with a moderate to high risk appetite can look at investing in bluechip stocks during market corrections. Many analysts are expecting a 10-15 percent correction in the short term.

Equity mutual funds are a good bet for investors who want to ride the market waves without getting into direct equity investments. A systematic investment plan (SIP) can be a good way to invest in mutual funds for investors looking at investing in equity mutual funds. Under a SIP, the investor's money is invested at regular intervals and thus it helps in averaging the entry price.

Debt market


The interest rates on the bank fixed deposits and bonds are coming down after the Reserve Bank of India (RBI) cut its key policy rates many times in the last eight months. Risk-averse investors and those with a short-term horizon should look at investing in debtbased instruments.

Debt instruments are not recommended to park money for a very long time as they provide negative returns after factoring in the income tax and the inflation rate. Usually, debt instruments provide lesser returns than the inflation rate in the economy.

However, debt-based instruments are good for the short-term investors as they provide capital protection. Investors looking at parking their money for a very short term can go for liquid funds.


Property


The property market went through a correction. An investment in property (residential or commercial) is good for a long-term perspective . Property investments have given good returns over the long term.

Commodity


Investments in commodities , especially gold, have given good returns in the last couple of years. Gold prices remained firm due to hedging and speculation in the global markets. Many large funds have used gold as a hedging instrument against the weakening US dollar and rising crude oil prices. Investors can look at investing in gold exchange-traded funds, real estate funds and international funds as they add to the diversification and help in lowering risk in the portfolio.

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