Here's how you can build a low-risk portfolio

India’s deadly second wave of Coronavirus has forced many investors to lower their risk tolerance and turn risk-averse. Rising healthcare cost coupled with financial uncertainty looming over Indian economy has prompted retail investors to give a re-look into their investment portfolio and lean towards instruments that have lesser risk.

This is normal human instinct and there is no harm in becoming relatively risk-averse in these times of heightened uncertainties, especially if doing so suits your financial goals and helps you in avoiding losses in a volatile market.

However, when you choose a risk-averse investment strategy, you often need to lower your return expectations too. But If you can carefully select the right type of low-risk investment instruments, it will improve your portfolio return while keeping the risk under control at the same time. Investing in short term bond funds, top-rated liquid funds, and applying a staggered investment approach in equity mutual funds for the long term are some of the options for you in this uncertain time.

Debt funds could be great alternatives for investors who don’t want to invest in fixed deposits (FDs). Such funds are more tax-efficient than FDs, and they have the potential of fetching better returns.

As there are chances of interest rate hikes in the future, investors could invest in short-term bond funds. Funds having exposure to bonds of long-duration maturities are prone to interest rate risk.

But short-term debt funds carry lower interest rate risk as they invest in bonds with maturities of less than 5 years, for example, commercial papers, government securities.

So, if you are looking for a low-risk investment option then short-term bond funds can be considered to be a part of your portfolio

You may be avoiding investing in equities in the current market due to excess volatility though it is a good time to stocks of your choice in dips.

However, you may not want to give up chances to earn a high return by investing in the stock market. To avoid a loss of capital, you can invest your funds in a top-rated liquid fund or high-interest fixed deposit account with the minimum income plan (MIP) option systematically and slowly transfer funds from them into top-rated equity mutual funds.

In this way, you will be able to ensure a higher degree of safety of your primary investment. On the other hand, if the market performs well, you will be able to earn a better return than reinvesting the interest into a fixed deposit.

In this time of uncertainty, one can apply a staggered investment approach in equity mutual funds for the long term. When you want to invest a lump sum amount, you may park the corpus in a liquid fund and wait for a downward correction in the stock market to gradually stagger it step by step.

When there is a significant dip in the stock market, you may shift a fixed ratio of liquid fund corpus to the selected equity fund.

For example, suppose you shift 10% of the remaining allocation in the liquid fund to an equity fund whenever the stock market falls by more than 10% from the last entry-level.

Assuming you get a total of five chances in a year, it means you will be able to shift approximately 41% of the allocation in liquid funds to equity funds.

If the market falls further, you may continue to shift. If the market rises further, you will benefit from rupee cost averaging, and your portfolio value will increase. The longer investment horizon will result in better performance and reduced risk when you invest using this strategy.

(The writer is CEO, Retail at IIFL Securities Limited)