Balance your portfolio to manage risk involved

24 OCT, 2010, 06.26AM IST, SRIKALA BHASHYAM,ET BUREAU
Balance your portfolio to manage risk involved


Investors face different kinds of challenges at different points in time, and as the investor and investment portfolio get older the challenge is that of managing risk. Not only because there is a change in the age of the investor, but also because a larger corpus always demands prudent investment strategies. That is one of the reasons why you find high net worth individuals (HNIs) also being active investors in a number of debt and structured products with a focus on capital protection. 

At the current levels, those who have a predominantly equity portfolio can look at some amount of unwinding, but should restrict it to a small percentage. The key word here is percentage as it could be in the region of 10-20 percent of a long portfolio, as the short and long-term outlooks continue to carry a positive bias. 

The question is why should you worry about profit booking if you are a long-term investor? 

As has been observed, the worst thing for an investor is the loss of opportunity to make profits and it is not restricted to the buy side alone. In fact, many investors complain that they find the decision to sell more challenging than investing. 

This could become relatively easier if an investor fixes a target for his returns and allocates money across different products. 

The task of managing risk can be a lot easier if the investor allocates his corpus across products which have different risk profiles. In this scenario, the management of risk is a lot easier and one can also take a more passive investment strategy. 

For instance, if the portfolio aims to generate an annual return of 10-12 percent over a long term, it can afford to park a larger chunk of funds in fixedreturn instruments with the ability to generate 8-9 percent. The pressure to generate a 15-percent return would be on a smaller chunk of the portfolio to achieve the overall target. More importantly, the profits generated by the aggressive portfolio can be ploughed back to the fixedreturn corpus as it ensures the achievement of the target over a long term. 

To manage this scenario, of course, you need to be systematic with the portfolio management. At the institutional level, products like portfolio management service (PMS) ensure such actions as a fund manager constantly looks for products that can ensure targeted returns. The task is much more challenging at the individual level simply because it is difficult to keep track of options that come up from time to time. 

One way is a periodic review at regular intervals and rebalancing the portfolio according to performance. Another option is to make use of the products that allow such rebalancing. 

The recently-launched products from insurance and mutual funds with a trigger option ensure profit booking on an automatic basis. In fact, mutual funds have also built in this facility to systematic investment plans (SIPs) that allow higher investment amounts in the event of steep correction. 

The task gets challenging when an investor independently does his investment planning, particularly with respect to stocks. The need for dynamic fund management is a lot lower in the case of other assets, in any case. For instance, an investment in real estate need not be monitored on an annual basis and can be left untouched for a period of 3-5 years. On the other hand, a stock which is not monitored for more than five years can get the investor into trouble, and the chances are that the fortunes of a company may have undergone a drastic change during the period.

http://economictimes.indiatimes.com/features/financial-times/Balance-your-portfolio-to-manage-risk-involved/articleshow/6798768.cms