The second wave of COVID-19 has already proved to be more lethal than the first wave, and the businesses have been forced to close or work with a limited workforce in order to curb the spread of infection. This has not helped stock markets, and they have been volatile over the last month and a half.
With the possibility of third and fourth waves looming large, investors have to be cautious about their investments and ensure they get their strategies right. Amid volatility in the market, how should investors go about investing? Here are a few tips:
i) Diversify your portfolio
Challenging times like these have reiterated the importance of diversifying your portfolio. It is essential to spread your investments across asset classes. By doing so, you will reduce the risk of concentration, that is, the risk of facing severe losses when a particular asset class or sector underperforms. A diversified portfolio may see other asset classes and securities cover up for losses resulting from the underperformance of a given security.
Do: Invest in different asset classes that help you diversify your portfolio and minimise the overall risk. Assess the risk involved and ensure your objectives are being served.
Don’t: Don’t not invest in assets whose risk level is not in sync with your profile. If you are investing in mutual funds, ensure that no two funds have overlapping portfolios.
ii) Invest with a long-term horizon
Equity markets are known to provide excellent returns when you invest with a tenure longer than five years. Market movements should not deter you, as volatility is the only constant that comes with equity investments. You should remain calm and stay invested for as long as possible to reap the best return on your investment, and you will eventually ride the wave of volatility.
Do: Stay invested for a longer period and consider investing in mutual funds via an SIP, which will see you buy fund units at different prices, giving you the benefit of all market cycles.
Don’t: Do not sell your holdings due to a market fall. Remember, markets will not remain the same; they will always fluctuate. If you exit during a bearish market, it may result in losses.
iii) Do not invest only in fixed-income
Investing in fixed-income securities is definitely going to help you stabilise your portfolio to an extent as they come with lower risk and may provide regular returns. However, the returns they offer may be curtailed as the associated risk is lower. Therefore, fixed-income securities may not be the dominant part of your portfolio. In order to grow your wealth, equities are the best option.
Do: Determine your equity exposure using the rule of 100 minus age. For instance, if you are aged 25 years, your equity exposure should be 100 minus 25, 75%. Fixed-income investments should constitute the remaining 25% of your portfolio.
Don’t: Do not invest heavily in fixed-income securities as your overall returns may get lower.
Investors have to be cautious about the market developments and take all precautions to protect their investments. Do not make decisions in haste, and do not let knee jerk reactions of the market deter your investments. Staying invested for a more extended period will help you earn higher returns.
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Engineer by qualification, financial writer by choice. I am always open to learning new things.