Unlike popular investment contradiction, mere wealth creation is not the primary and only goal of a portfolio. Safeguarding your wealth is equally important. If you wish to preserve your wealth, you can choose from several investment options. One of the widely popular investment options include investing in debt funds that are less vulnerable to market volatilities.
But, what about the risk that emerges from different phases of investment? In other words, how and when does an investor successfully de-risk their investment portfolio? Let’s read this article to find that answer.
For starters, you need to evaluate the life stage. As per economic perspective, there are three phases in an investor’s life – gathering capital, preserving the gathered capital, and distribution of capital.
In the first phase, an investor is typically young, often in the golden years of their career – 20s and 30s, and often even 40s. This phase witnesses saving as much as possible as and when they can. During this phase, an investor can easily afford to invest in equities and equity-related securities as they are starting young. Thus, investors in this phase have the liberty to allot a substantial part of their portfolio to equity securities. De-risking one’s portfolio might not be an important concern right now.
Next comes the preservation stage where an individual slowly starts to de-risk their portfolio as they near the end of their investment horizon. Usually, investors belonging to the age bracket of 50s or so, begin to systematically diminish their exposure in equities as and when they near their retirement or investment goals.
Last but not the least, the distribution phase is accompanied by an investor actively seeking for a regular income basis the corpus and financial assets achieved and accrued by them until now. This phases usually takes place once an investor has retired. Ideally, an investor must not be exposed to too much risk. So rather than generating capital, this phase focuses on preserving the capital gained until now and ensuring that their investments also beat inflation.
What are the different ways to de-risk an investment portfolio?
There are several ways of de-risking aportfolio. Let’s understand the most common ways:
- Modifying the asset allocation strategy – In this method, an investor alters their investment strategy in the favor of debt instruments. Though this strategy is an excellent way to re-balance your portfolio, it might entice certain tax implications on your investments.
- New investments – If you wish to defer such tax implications, then you might consider starting fresh investments into debt instruments. This will help to diminish the overall exposure of your portfolio towards equities.
- Intra asset shuffle – Another option is tweaking the composition of your portfolio within the same asset class. For instance, equity mutual funds are further bifurcated into small-cap mutual funds, mid-cap mutual funds, and large-cap mutual funds. If you wish to reduce the overall equity composition of your portfolio, consider shifting from small-cap equity funds to mid-cap equity funds. You might also shift from mid-cap equity funds to large-cap equity funds.
Remember to de-risk your investment portfolio after taking the tax implications into account. Happy investing!