“Risk comes from not knowing what you are doing.”-Warren Buffet

There is inherent risk in every choice of investment. However, if you know how to manage the risk as it meant to be then the process becomes quite simple. Both terms risk and return haunt not just naïve investor but some time to expert as & when in turbulent times the safest investment fails to meet the expectation.

Risk & Return goes hand in hand, to put it in simpler words the degree of risk defines the return percentage as Higher the Risk Higher the Return.

Various Investment tools

Every individual has some financial goals that vary as we mature. A smart investor should change his investment approach as per his needs and product suitability. Therefore a proper analysis is a must before choosing any investing plan

Diversification, particularly in finance can be defined as the process of reducing risk by exposing different investment and saving instruments to meet specific financial goals.

Here how you can go for it:

Define your goal: The financial goal for every individual is different although there are few basic principles like safety & growth which apply to everyone.

Broadly the goals are classified as:

• Child Education
• Child Marriage
• Home & property
• Retirement

Risk Analysis: After you have decided the goal whether it is short term or long term the next step is to find out the inherent risk & market risk of the security or assets.

Right valuations/ Situational Analysis: After analyzing the risk, pick up the investment tool at the right value which is derived by various valuation techniques. The right time and value are very important while picking up the assets.

Understand it like this in 2008-2009 equity market witness the deepest fall since the great depression in 1930, where equity portfolio wiped out investors capital & gold acted as a hedge and holds the portfolio further again the wheel turns and in 2009 equity-related products deliver the best results while gold generated negative returns.

Vehicles for diversification:

Design portfolio:  

The financial needs vary as per the age, gender, needs & goals. Nowadays young professionals focus not just on savings but they also want income for their leisure and fun. It is not just saving however the buzzing term in investing. The traditional saving method is a passé the young people in the age group of 20-25 when they have less responsibility should look out for equity-related instruments as at this age not obliged under financial obligations. Similarly 25-45 it is best to opt for a mix and well-balanced portfolio of debt & equity-related financial instruments with much exposure to risky assets class as they promise higher returns. People in the age group above 45 should plan for retirement and children's marriage and opt for a well-balanced portfolio.

Choose Assets Class: 

After analyzing the needs and requirement as per the risk competence the next is to choose the best available products which fit in your criteria.

Different products within the same Asset class: 

Even if you choose the asset it is imperative to diversify within the same assets class based on its characteristics and nature of risk and return. E.g. if you are building an equity portfolio then you have to pick aggressive stock along with defensive stock and growth stock in the domain. Similarly in the debt portfolio, an investor should be aware of which government bonds & security to pick up.

So in nutshell, it could be said that diversification is the key to manage your portfolio by keeping risk & retune in check from time to time.

Article Source- Tech Funda Academy

Author- Rekha Chauhan