Your Money: Ways To De-Risk Your Portfolio

Diversify your investments across and within asset classes, spread your risk across funds.

The usual approach to diversifying your investment portfolio is allocation to multiple asset classes — equity, debt, and perhaps other categories like gold or real estate. Once that part is done, there is a case for giving it another thought about how to de-risk it further. The idea is to keep your eggs across as many baskets as feasible and advisable.

Diversification within asset category: As an illustration, within equity, there are categories of stocks. The common categories are (a) market capitalisation based; i.e., large cap, mid cap and small cap and (b) sector based; i.e., a particular industry like banking or IT or pharmaceuticals. That apart, fund managers may have other basis for categorisation; high beta or low beta which signifies the extent to which the stock moves along with the market benchmark.

What a beta means?

A beta of more than one means the stock goes up more than the reference index when the market is bullish and loses more in a bearish market. A low beta stock is more defensive and moves relatively less than the benchmark, on market movements. These have their typical behavioural patterns and you have to diversify the equity component of your portfolio accordingly.

Similarly, in fixed income, there are categories like long maturity which move more along with market interest rate movements, similar to high beta in equities. There are shorter maturity bonds / bond funds that are more defensive and make your portfolio returns more stable when interest rates are moving up or down. You have to diversify accordingly, as per your investment horizon and appetite for volatility in returns.

Portfolio diversification

Gold acts as a portfolio diversifier. The returns you earn on your portfolio is the composite of all the components. When you add gold as an investment, the overall performance of your portfolio becomes more stable.

Diversification across managers: When you are taking the route of fund management vehicles, e.g., mutual funds, you should spread your money across funds and fund management houses. This is to spread your risk across funds and managers. As an example, a portfolio of mutual funds, comprising equity, debt, gold, etc., across three funds is concentrated. If it is across 20 funds, that is over-diversified and can be rationalised.

Diversification across geographies: India is the growth story in the world and the major component of your equity allocation, say 80%, should be in Indian equities. However, there is always a case for diversification. Even in today’s age of inter-connectedness and instant flow of information through the internet, market performances are different. When we look at year-wise returns of various markets — USA, European countries, India, China, etc., the winner varies. No one country outperforms every year. Hence you can invest part of your equity money in other geographies. This can be done either through the mutual fund route or the Liberalized Remittance Scheme (LRS).

On mutual funds, currently there are certain regulatory limits for investment abroad. However, limits open from time to time on redemptions, and investment limits are available on Exchange Traded Funds (ETFs). Through the LRS route, one can buy stocks or bonds abroad, up to the limit of $250,000 per financial year, which is approximately `2 crore per year. This also leads to diversification in currency; i.e., depreciation in the rupee adds to your return from international funds.

Diversification from your profession: Carrying the argument further, you earn your money from your job or business or profession which you save and invest for the future. Though remotely, the industry you work in is subject to downturns from time to time. If it is a business, there is a higher one-to-one correspondence with industry fortunes. If it is a salaried job, the correspondence is relatively lesser, but it is there to a certain extent. Preferably, in your investment portfolio, you may avoid the industry that is your primary source of income.


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