How to de-risk your investments when goals are near

All investments should be based on your financial goals. However, once your goals are near, how should you manage your investments?

Investing happens in three phases—planning, accumulation, and redemption. While many investors focus on the first two phases of investment, very few pay attention to the final stage. Just like you plan for the accumulation phase, you also need to plan your redemptions to ensure capital protection.

But how do you go about doing that? You can manage your investment portfolio and optimise your redemption amount through de-risking.

De-risking refers to the process of altering your asset allocation to ensure that you meet your financial goals. As your goals get near, you should de-risk your financial portfolio so that you do not risk losing your capital when the time for redemption comes around. Here’s how you can go about de-risking your portfolio:

  1. Consider Your Goal

Your investments may be tailored to your financial goals. For instance, you may have invested in equities and equity mutual funds for your child’s education. If that goal is nearing, you should start de-risking by moving the investment amount into debt funds. You could do this through Systematic Transfer Plans (STPs) or divert interest income into debt funds. If your goal is to buy a house, you may have started saving for the down payment. To avoid getting hit by market volatility in equities and equity mutual funds, begin shifting your investment amount into a debt fund. If you are nearing retirement, you may want to keep a portion of the money in equities and move only the income you need immediately into more stable sources.

  • Look at The Timeline

De-risking is usually done for mid-term and long-term goals. If your financial goal is about two to three years away, it is time to start moving your equity investments into more stable and less volatile assets. For instance, if your retirement is three years away, you should start diverting your equity investments into debt funds and fixed deposits so that you don’t lose money in case the market falls.

  • Consider Your Asset Allocation

Equity investments generally need at least five to seven years to perform well but sometimes equity performs in short period. If you are nearing your financial goal and a majority of your investments are in equities, you need a plan to move them to more secure investments. Ideally, your goal amount should have at least 70%-80% allocation in debt instruments. The remaining can be in equities. If you have a lot of physical gold, then consider the timing. Sell at a high and park the money in debt funds. In case you are looking to sell off the property to meet a goal, keep a timeline of at least two to three years so that you have enough runway to meet documentation and reinvestment requirements.

  • Think About Intra-Asset Shifts

If you do not want to move away from existing asset classes, you could shuffle the investments within the same asset class to less risky investments. For instance, if you have a lot of money in small-cap funds, you could move them to large-cap funds to reduce risk. As you near your goal, you could shift to liquid funds from long-term debt funds so that there is less volatility.

De-risking your portfolio the right way is important to ensure that you meet your goals without losing capital. You can consult Geojit experts to optimise your portfolio de-risking in a tax-efficient way.

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