A Risk and Reward  analysis:

Manage your Investment Portfolio efficiently: Diversification is the key.

The first lesson on Investment strategy starts with the statement that Risk and reward are related to each  other closely and Risk is directly proportional to the reward. So be aware of that and based on the risk bearing capacity or appetite (which varies according to age too!) one should always spend time to evaluate the risk in each script in the basket with VaR (value at Risk) concept.. So it is imperative to manage the risk of your portfolio to significantly reduce the risk and at the same time enhance the portfolio’s value over a period of time. This needs constant attention and swapping and Hedging techniques need to be deployed on time. So the portfolio with the least risk like FDs in banks, Post offices, Govt bonds etc., will fetch the least returns. So the basket should have a variety of Fruits like apples, oranges, grapes, banana, Pine apple, Jack fruits etc., The last two have a longer shelf life. Similarly the Portfolio will have short term yielding, medium term and long term yield tenure. The Mutual Funds – balanced funds will provide good yield over a longer period of time. Some counters will provide less momentum but passive income like Dividend, rights  (like recent Reliance and M & M Finance) and bonus benefits will accrue. So a highly diversified portfolio will lead to reduced risk.

Managing risk is more germane today than ever before as the markets are quite topsy-turvy in times like this thanks to Covid ’19.  Risk is measured in statistics through a tool known as Standard Deviation (SD).   It is pertinent to note that the markets have suffered  25 % or more drops  -10 times since 1991, on an average of once in every three years. So naturally your portfolio would also suffer 25 % or more in terms of valuation once in three or four years. So we need to watch the market closely and take quick decisions to book the profits or book losses when it is low and re balance the portfolio frequently. If one cannot do this better delegate this to trained Professional Fund Managers like MFs or Professional Portfolio Managers for a fee,.There are also some equities that perform well even when the index is generally down like Pharma, I.T etc., So include them in your portfolio.

To quote a few examples,  In the 15 years period  ended December 2019, the standard deviation of the Nifty 50 Index was 32%, while its average annual return was 19%.  Likewise, the standard deviation of the Nifty Small cap 250 Index for the same period was 51% and its average return was 25%, implying its returns ranged between -26% to 76%, in 10 of the 15 years period. Essentially, standard deviation tells you precisely how much your portfolio could swing over time. The higher standard deviation for the Nifty Small cap 250 Index (representing small-cap stocks) means it is riskier than the Nifty 50 Index (representing large-cap stocks). Please remember that  one can see how a higher standard deviation or risk implies your portfolio has to work that much harder to grow over time.

So learn the behavior of the markets in good times and bad times, understand both technical and fundamental analytical tools, secure market information relating to Economy, Finance, social and political  and  analyse the impact of the variance in these on your portfolio and take appropriate but swift action and manage the portfolio accordingly by swapping , Hedging etc.,and have a healthy and profitable portfolio.

Wish you value  based and smart investing ahead !

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