Strategies to reduce volatility

One of the biggest challenges for the investor is to ease volatility in his investment portfolio. Not many can stomach the wild swings in stock markets and the impact it leaves on their investments. Under the circumstances charting a strategy to keeps volatility under control is one of the primary tasks of the investor.

Here are five ways in which investors can get a grip on volatility:

1. Avoid high risk investments
Mutual fund investments like mid cap funds and sector funds are not for everyone. If you are the kind of person who cannot stomach a 100-point decline in stock markets, avoid these funds altogether or invest a limited amount of money depending on your risk appetite.

2. Prefer diversified equity funds
It’s always a prudent idea to go for well-diversified equity funds. Such funds have a broader investment mandate which positions them to counter volatility more effectively.

3. Get you asset allocation right
Every time stock markets run up sharply, your asset allocation tilts precariously towards equities. Put differently, your portfolio is equity-heavy and an ensuing decline in markets could see a fall in your portfolio value.

It’s a good idea to re-balance your portfolio at regular intervals, of say 12 months. If you have seen noticeable gains in your equity component over the last year, re-balance the gains by shifting it into debt. This serves to de-risk your portfolio.

4. Consider value funds
The value style of investing is about buying stocks that are trading at a discount to their intrinsic / book values. Such stocks are referred to as value buys - think of a pricey smartphone at a discount. Since these stocks are already trading at lows, a fall, if any, is unlikely to be as sharp as that of a stock trading at historical highs.

Value funds can be identified by the investment objective or positioning of the mutual fund.

5. Go for short-term debt funds
On the debt side, prefer funds with shorter investment time frames - of less than 12 months. Such funds (liquid, ultra short-term) do not take interest rate calls and aim at capital preservation above all else.

Investing in a portfolio with less volatility isn’t as difficult as it looks. It’s a combination of understanding your own risk appetite and finding suitable investments, like the ones listed here, that are a good fit in your portfolio.

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