We all want to be wealthy, but just earning a substantial monthly salary is not enough to secure your financial future. We/You are investing in equity-related avenues to get high returns on your investment portfolio without weighing the risks; you might not be heading in the right direction.
In this blog, we will discuss 10 best ways that you can take to reduce the overall risk in your investment portfolio, starting with understanding your risk tolerance.
Ways to Reduce Risk in Your Stock Investment
- Cost Averaging Investment
- Exchange Traded Funds Investment
- Market Caps Diversification
- Sectors Diversification
- Treasury Bills and Bond Funds
- Invest in IPO
- Reinvest Dividends
- Think Twice Before Selling
- Use Stop Losses
- Invest In PSU (Public Sector Undertakings)
1. Cost Averaging Investment
The Cost averaging is very simple method that will help you to reduce your risk ton stock market investment. Cost Averaging means investing the same amount of money every month, or quarter, or some other regular interval, rather than investing a large amount of money all at once.
2. Exchange Traded Funds Investment
Exchange Traded Funds (ETF) is including in the Index Funds. The index funds are less risky as compare to equity and commodity stocks. The Index Funds contain many types of investments, including stocks, commodities, bonds, or a mixture of investment types such that Nifty Fifty ETF, Pharma ETF, IT ETF, CPSE ETF, Infra ETF etc.
3. Market Caps Diversification
In your investment portfolio you should buy different market capitalization stocks such that 30% large cap, 40% Mid cap, 20% small cap, and 10% micro cap. It helps you to balance your investment portfolio and reduce the risk of loss.
4. Sectors Diversification
Sector diversification constituting of a portfolio of stocks of companies in each major sectors or industry group. Like Health Care, Financials, Utilities, Consumer Discretionary, Communication Services, Technology etc.
5. Treasury bills and Bond Funds
In your investment portfolio you should also invest in Bond funds and Treasury bills where you can get return fix amount of percentage and it helps you to balance your Portfolio.
6. Invest with IPO
IPO (Initial Public Offering) is the process by which a privately held company becomes a publicly traded company by offering its shares to the public for the first time. When you will invest via an IPO you can get maximum returns for long term and other benefits like Dividends, Bonus and share splits etc.
7. Reinvest Dividends
When you buy a stock or fund, you can choose to reinvest dividends to help compound your investment gains. Reinvesting dividends, rather than letting the money pile up in cash in your brokerage account, also helps you avoid opportunity cost and losses from inflation.
8. Think Twice Before Selling
When everyone around you is panicking, that’s the time to buy, not sell. Hold the course and keep buying. And before the selling you should think twice. If you got your target or return goals you can sell otherwise hold your position.
9. Use Stop Losses
Stop loss orders protect against falling share prices. The stop loss helps you to reduce your loss of investment. For example, when you buy Company A’s stock for 10 per share with a stop loss of 9, the stock is automatically sold if the price drops to 9.
10. Invest In PSU (Public Sector Undertakings)
PSUs or public sector undertakings are closely linked to the core sectors of the economy. These undertakings are majority owned by the Government of India. These core sectors are namely finance, coal, capital goods, infrastructure, oil, and power, metal and mining. The PSU sector is low risky and it can give you good returns as well.