Mere capital appreciation is not the key aspects of an investment portfolio. Capital preservation of a part of a portfolio is equally important. To preserve one’s investment portfolio, an investor is offered with several choices. One of the most popular choices including investing in debt funds or debt securities which are less vulnerable to uncertainties and volatilities in the market. However, the risk that originates from varying phases of saving and investment is not taken into account. In essence when and how can an investor de-risk their investment portfolio? This article aims to answer this question. Read on to know more.
Firstly, an investor needs to analyse the life stage they are currently in. From an economic standpoint of view, there are three life stages, namely, accumulation of wealth, preservation (at least a part of the portfolio) of the wealth, distribution of wealth.
In the accumulation phase, an investor is fairly young, usually the prime years of their career – 20s, 30s, and sometimes even 40s. In this phase, an investor saves more and more as and when their income level shoots up. As equities and equity-related instruments need a long-term investment horizon of at least seven years and up, and for these investors’ retirement is easily an decade away. Thus, these accumulators have the margin to dedicate a significant portion of their portfolio to equities. De-risking their investment portfolio is not much of a priority right now.
Then there’s the preservation phase where investors steadily begin to de-risk their investment portfolio as the maturity period approaches. Usually, investors who are in their 50s consider to systematically reduce their equities exposure as and when they near their financial goals or retirement.
Finally, in the last phase of distribution of wealth, one begins to fetch regular income depending on their financial assets and corpus achieved. This phase usually happens after retirement. Ideally, an investor’s portfolio should not be exposed to much risk by now. Hence, in this phase the focus is to preserve wealth while also ensuring to beat inflation rather than generating wealth.
Different methods to de-risk investment portfolio
There are several ways of de-risking an investment portfolio. Some of them are explained before:
- Tweaking asset allocation of your investment portfolio – This is one of the most popular ways of de-risking a portfolio. In this method, an investor tweaks their asset allocation strategy in the favour of debt securities. However, note that though this re-balancing of portfolio can be an excellent way to de-risk your portfolio, it might attract certain tax implications.
- Diverting new types of investment – If you wish to avoid the above-mentioned tax implications, you might consider steering new types of investments into debt securities to decrease the overall exposure of equities and equity-related instruments.
- Intra asset shuffle – Lastly, you might consider tweaking the portfolio composition of a fund within the same asset class. For instance, there are different types of mutual funds under equities, say, small-cap equity fund, mid-cap equity fund, and large-cap equity fund. Shifting assets from mid to large-cap funds or small to mid-cap funds can help to reduce the overall exposure in equities.
An investor must consider de-risking their investment portfolio as and when they near their retirement. In doing so, one must ensure that they do it in a tax-efficient manner. Happy investing!