How to minimise risk in your stock portfolio?

The stock markets have been volatile since October 2021, when foreign institutional investors started exiting the Indian stock markets. The Russian invasion of Ukraine has pushed up International Crude oil prices. It impacts India, which imports more than 80% of its energy needs. Moreover, the tension between China and Taiwan may keep the World and Indian stock markets volatile for some time. How can you cut risk in your stock portfolio amidst geopolitical tensions?

How have volatile stock markets impacted Indian equity investors?

Volatile stock markets have impacted the sentiments of equity investors. For instance, according to AMFI data, net inflows into equity funds fell by 42% in July 2022 to Rs 8,898 crore from Rs 15,497 crore in June 2022. Moreover, Systematic Investment Plan (SIP) contributions fell marginally in July 2022 to Rs 12,139 crore from Rs 12,285 crore in June 2022. 

Many equity investors indulged in profit booking as the stock markets rebounded in July. The main reasons for negative investor sentiment were the rising inflation and RBI hiking the interest rates in India. For instance, the Consumer Price Index (CPI) was 7.01% in June 2022. It was the sixth consecutive month; that CPI data breached RBI’s upper tolerance level of 6%. 

How to cut risk in your stock portfolio?

The stock markets are vulnerable to macroeconomic factors like war, recession, inflation or rising interest rates. However, many of these factors impact stock markets in the short run. It leads to short-term fluctuations in stock prices. 

The best way to beat short-term fluctuations in the stock market is to stay invested in stocks for the long term. You may consider ignoring market noise and increasing your investment horizon to negate the impact of volatility on your stock portfolio. For example, you may invest in stocks with a time horizon of three to five years rather than one year. 

You may follow an integral approach to picking stocks of fundamentally solid companies for your stock portfolio. For example, these companies have strong financials, track record of performance and good corporate governance. 

Companies with excellent distribution networks and a strong brand image may enjoy an economic moat. It is a competitive advantage over peers and rivals that translates into dominant market share over time. One of the significant benefits of picking stocks with solid fundamentals is that you could make profits even if you enter them at the wrong time and stay invested for long periods. 

You could diversify your investment portfolio across stocks and fixed income investments to mitigate investment risk. For example, you may prefer investing predominantly in stocks. However, your investment in shares is vulnerable to a stock market crash. It helps to spread your portfolio across debt funds, bank FDs and small savings schemes to protect your investment portfolio against a market correction. 

You could monitor your stock portfolio regularly to weed out the nonperformers. Otherwise, the investment risk may surge, leading to severe losses during a stock market correction. Moreover, you must consider your risk tolerance before investing in the stock market. It depends on your age, number of dependents, income, etc. 

You may keep cash ready to buy stocks of fundamentally-solid companies during a stock market downturn. It helps you buy quality stocks at lower prices. You must save money for a financial crisis in an emergency fund. Otherwise, you may have to exit your stocks at a loss even in a stock market downturn if you face a financial emergency.

For any clarifications/feedback on the topic, please contact the writer at cleyon.dsouza@clear.in