There’s no denying that every investor is different and has his own style of investing. What may be a great portfolio for you may not be the same for another person. Simply put, every investor’s portfolio is different. Factors like age, risk appetite, and financial role-play important roles in selecting a portfolio of a low-risk appetite investor is completely different from the portfolio of a high-risk appetite investor. While a high-risk appetite investor has an aggressive allocation, low-risk appetite investors have a conservative approach.
While some investors don’t worry much even when there is a 25-30% move in their portfolio, others may get paranoid even with half percent shift. So, how should investors with low-risk appetite invest?
Firstly, remember, risk-taking ability depends on age, financial status, goals, family, etc. Additionally, risk tolerance is about your behavior during adverse market movements and people with low-risk tolerance may not necessarily be investors with low-risk appetite.
In this article, we have shared three tips to help you invest particularly if you are a low-risk investor.
1. Avoid investing in equity if you cannot digest market volatility
If you are a person who constantly checks your investment portfolio every few hours in a day and panic with market investments, it is advisable you avoid equities completely. Sure, you may lose out on a greater return potential by doing so, it is still better than buying high and selling low.
Do note that short term volatility isn’t a major issue for investors who start investing early in their investment career. In fact, the longer you stay invested, the higher the returns you can enjoy. For instance, you can think of a multi-asset portfolio. Though it has some equity portion, your long-term investment horizon will take care of the volatility.
Low-risk investments come with lower returns. Safe investments such as PPF or bank FDs have a lock-in period and have volatility issues. Therefore, you will have to stay invested in your lock-in period. Also, you will have to bear additional costs in case you withdraw early.
Debt mutual funds are better alternatives to PPF and bank FDs. You can invest in debt funds for a minimum of three and take advantage of indexation benefit on long term gains.
As a low-risk appetite investor, you may consider choosing debt mutual funds as they help you earn higher returns.
2. Invest in equities with a proportion that will not worry you much
If you have cash that you can invest without worrying about the principal amount then you must consider equity investments. While pure equity investments in shares involve high risks of investing in equity mutual funds would diversify your risk.
With these investments, though you are a low-risk appetite investor, you will have to stop worrying about short-term market movements. You should review your portfolio on a regular basis and assess its alignment with your goals. By reviewing your portfolio and rebalancing is will help keep the asset allocation in check and within your comfort zone.
Additionally, you can opt for Systematic Investment Plans (SIP) for your equity investments which help in rupee cost averaging. By opting for SIPs, you need not worry about timing the market or worry about the price of the asset. However, try to stay invested for long-term to average out your costs and maximize returns. In short, invest through SIPs for a longer duration to minimize risks.
3. Follow a goal-based approach
Whether you are a first-time investor or an experienced investor, make sure to follow a goal-based investing. You can categorize your goals as short-term, medium-term, and long term as it will help you decide on asset allocation. For short-term goals, you can consider investing in low-risk funds. For medium-term you can have around 10% equity exposure while for long-term investments you can have a little higher equity exposure. Over time, the returns will be higher as it averages out the risk.
Before you start your investment, you will have to identify your goals and prioritize them based on time. For low risk appetite investors, investing in equity for a long-term will save you from worrying about short term market movements. This approach will be beneficial for long term goals such as child education, wedding and your retirement. As you approach your goal, you can reduce your equity exposure.