How to Balance Risk and Reward in Your Investment Portfolio?

1. Market risks include concepts such as demand, supply, volume, prices, etc, that can severely affect your investment plans.
   How to deal with it: Diversify your portfolio. Don’t put all your eggs in one basket.
2. Next on the list is credit risk, which arises when a borrower fails to repay a loan or financial obligation.
   How to deal with it: Remember that higher credit quality can empower you to reduce the risk. Also, the issuer's financials should be monitored regularly.
3. Liquidity risk arises when it becomes difficult to sell an asset at a fair price due to a lack of buyers.
   How to deal with it: Maintain a balanced mix of liquid and illiquid assets. Regularly review market conditions and always set aside an emergency fund.
4. Inflation is when a general increase in prices over time erodes purchasing power. Inflation risk occurs when the inflation rate becomes higher than your returns.
   How to deal with it: If possible, make some investments that can help you outpace inflation. However, it's a high-risk, high-reward game, so tread carefully!

Did you know that retail inflation in India dropped to an impressive 4.6% in the financial year 2024–25? This is the lowest inflation level the country has seen since 2018–19.

How to Balance Risk and Reward in Your Investment Portfolio?

Here's hoping that you have had clarity on the different risks that hover over your investment plans. The next step is to learn how you can balance this risk with the return. There are several ways, and you can choose one or more to align them with your financial goals.

Know your risk appetite

You need to know how much risk you are comfortable with. Factors in your preferences, your financial standing, and your financial goals, and then decide how much risk you are ready to take to achieve a certain reward.

Spread and diversify

Diversification is closely linked to risk and reward. When you diversify your funds across different instruments, the risk also gets spread.

Create a hedge

When you invest, you have to create a hedge around it to keep it safe. Hedging is a commonly used strategy for risk management. It is used to offset the probable losses in an investment by taking an opposite position in a related asset. Thus helping you protect your portfolio against market volatility.

Stop-loss orders

When dealing with stocks, you have the option of setting your trades on stop-loss orders. You can limit your losses automatically when they reach a certain price.

Make the most of rupee-cost averaging

When you invest a set amount regularly, regardless of market conditions. You can manage the risk of market volatility and help accumulate more units when prices are low.

Pick a suitable investment horizon

Carefully choose the term you wish to stay invested in. Factor in your income, your upcoming expenses, and how long you can hold the investment. For example, if you are planning to retire soon, investing for a very long time might not be the ideal way forward. However, if you are in your 20s, you can easily plan to invest for at least 5 to 10 years.

Do your homework

Before you go all in, it is important to consider different factors that can influence your investment plans. Make sure you assess the return on the investment that you are expecting. A market analysis can also help you understand your investment.

Be pro-active

While it may not be possible to time the ever-evolving market all the time, you can keep a watchful eye on the ongoing and expected turns that can affect your returns.

Rebalance your portfolio

While it is important not to get swayed every time the market fluctuates, it is also essential to keep reviewing and rebalancing your portfolio.

Invest long term

When you invest for a longer time, you allow your investments to ride out the short-term volatility. Longer investments are typically less risky than those with short-term. You also benefit from the power of compounding.

In Conclusion

Investing can be complex. However, patience, understanding and experience can help you master the tricks of the trade. Make sure that you approach all your investment plans with a disciplined strategy that includes diversification, buy-and-hold, and rupee-cost averaging techniques.

At Jio Insurance Broking, we strive to bring you the plans that best suit your needs. We recommend following the principles mentioned above, as they can help you build a resilient portfolio that allows you to weather market storms and achieve long-term financial goals.