[ad_1]
If trading were a game in an amusement park, the recent movement on the Nifty Index might as well be classified as dive roller coaster. Such price movements subject your investment portfolio to high risk. In this article, we discuss why taking active decisions on portfolio is becoming more crucial than before.
Volatility risk
Suppose your investment has accumulated 50% return over the last three years, and then the market tanks 33%. You will lose all your unrealised gains. If you have some more years to achieve the goal for which the investments were earmarked, you can regain some of the losses. But will you be able to accumulate enough wealth in time to achieve your goal?
When the primary return on your investments is from capital appreciation, you must be mindful of how volatility (price fluctuations) can hurt the value of your investments, and therefore your life goals. A buy-and-hold strategy may not work in such volatile markets, even if you have a long time horizon to achieve your goal. This argument is true whether you invest in active or passive funds (ETFs and index funds). Why?
The portfolio manager of an active fund may decide when to take profit on securities held in the portfolio. But as long as you stay invested in the fund, gains on units held in the fund are unrealised.
As for passive funds, the risk is greater as the fund manager will not take profit even if the market is overpriced. So, whether you invest in active or passive funds, you must continually manage your investments in the fund.
Conclusion
You can moderate the impact of volatility by having a pre-determined rule to take profits on your equity investments. Suppose you want a minimum annual return of 13%. If returns are greater than 13% in any year (say 15%), you should sell units to capture the excess returns (two percentage points). You should also be willing to buy more units when the market crashes due to global (macro-level) events. This is possible if you hold cash in your portfolio, especially during volatile markets. But be mindful of reducing your equity allocation if you are within 15-10 years from your retirement.
For all other goals, it is best to reduce equity allocation when you are within five years from the end of the time horizon for that goal.
(The author offers training programmes for individuals to manage their personal investments)
Published – April 28, 2025 02:54 am IST
[ad_2]
Why volatility matters
