Tuesday, October 3, 2023
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When and How to De-Risk Your Portfolio

Several investors are often in the dark that the primary goal of any type of investment is mere wealth creation.

However, that is not true. Preserving your capital is equally imperative. If you wish to create wealth, then investing in equities or equity-linked securities is one way to do it.

However, what about wealth preservation?

Where should an investor invest if they wish to safeguard their capital?

There are several investment options to choose from. Debt funds are one of the most sought-after investment options for investors looking to preserve their wealth.

But, what about the risk associated with different types of investments?

In simple words, how can an investor re-risk their portfolio?

In this article, we will shed light on the same and understand when and how to de-risk your investment portfolio.

Life Stage

Before we explain how to de-risk your portfolio, it is important to understand your current life stage. An investor passes through three different phases in their lifetime – accumulating capital, safeguarding the accumulated capital, and lastly distribution of capital.

The first phase marks the investors in their early ages of life, which is usually their golden years of career – in their 20s, 30s, or sometimes even 40s.

In this phase, an investor aims to save as much as possible. As an investor has just begun their investment journey, they can easily afford to invest in equity-related instruments. As an investor has a long way to go, de-risking of the portfolio might not be that important to an investor in this stage.

In the next stage, an investor aims to gradually de-risk their investment portfolio as they near the completion of their term. An investor is often in their 50s when they are in their preservation stage.

Hence, an investor must gradually decrease their exposure to equity-linked securities as they near the end of their investment horizon or retirement.

Lastly, in the distribution phase, an individual actively seeks a regular source of income flow from the financial assets and the investible corpus they have accrued until now. This phase often occurs when an individual has happily retired.

In this phase, an individual must not be exposed to high levels of risk. In this phase, the primary goal of an individual is safeguarding the capital generated until now rather than wealth creation.

How Far are your Investment Goals?

An investor could have different goals such as purchasing a house or saving for a child’s higher education or marriage, or even their own retirement. The basic idea over here is that once you near the completion of the term of a particular financial goal, you must begin the process of de-risking your portfolio.

Historically speaking, equities have proven to offer not just inflation-beating returns but also significantly higher returns when invested for a prolonged period of say 10 years or more.

So, if you have a long-term horizon, do ensure to allocate a significant portion of your corpus in equities and equity-related securities. Happy investing!

Ajeet Sharma, the founder of Financegab and a well-known name in the field of financial blogging. Blogging since 2017, he has the expertise and excellent knowledge about personal finance. Financegab is all about personal finance which aims to create awareness among people about personal finance and help them to make smart, well-informed financial decisions.


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