10 Ways to Combat Market Risk: A blog post discussing how to combat market risk and how Sharekhan helps you combat these risks

Sharekhan is a brokerage firm that offers a diverse range of financial products and services, including but not limited to; mutual funds, ESOP financing, etc. It is an online platform to help you from the basics of investing to a fulfilling trading experience. 

Investing in the stock market comes with its own set of risks. In this blog post, we will discuss 10 ways to combat market risk devised by Sharekhan. 

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If you have ever taken a statistics class in college, you might have heard of standard deviation. Just like a pendulum swing, the difference in the pendulum's position from one point to another, the difference between two positions, is the standard deviation. Similarly, a stock has fluctuations in its price, and it's essential to understand the risks involved with the same. 

 Having stocks in your portfolio is essential. However, investing in the right stocks is more critical: Sharekhan's recommended stock list helps diversify stocks based on fixed metrics, which helps maintain a diversified portfolio for the investor. 

Consider alternative investment: Sharekhan also recommends alternative investments.  

An alternative investment is a structured note issued by a large bank. E.g. Goldman Sachs and the way these structured notes work is simple.  

You get to participate in a percentage of a stock market index. If the index loses value, there is a buffer called buffer index. E.g., if an alternative investment loses value like, say, 10%, and the initial fixed value is 10%, the investor does not lose anything but gets to keep any gains from a fixed rate. (say about 12% even if the index is up by 15%). In this way, the involved risk is minimised. 

Investing in fixed index annuities: Fixed index annuities are also called growth annuities or bond alternatives. There is no risk of loss in this case. Even if the market goes down, there is no loss. On the flip side, the gains are negligible, i.e. 4-5% instead of 12%, so low risk and low return. 

Invest to hold stocks in the future and not for immediate gains: Buying a stock is like owning part of a business. Without being overly optimistic or pessimistic, Sharekhan helps you invest in stocks based on the fundamentals of a stock rather than the immediate gain or loss by the company. Based on trend analysis, past stock performance, and analysis of annual reports, Sharekhan helps you identify stocks for investment for long-term gain. 

An option for every investor type: Investing and the level of risk one can take varies as per age, income, and personal preference. If an investor wants to take the conservative route, Most people are suited to this route. One can go for a mixture of stocks and bonds in this case. The allocation should be refreshed once per year with a fixed amount of capital allocation. This also incorporates dollar-cost averaging. This also helps to ensure the portfolio is not limited to one sector. There also should be large companies with figures showing an established track record. This helps ensure that the companies are conservatively financed, with a current ratio of 200%. Such an option also ensures that these companies do not miss dividend payments and do not have earnings deficits. They also have an earnings growth of 2.9%. One should also not overpay for assets or earnings. The PE ratio should not be higher than 50%.  

Investing as an Enterprising investor: Today's stock market is riskier as the profits that companies can earn are finite, and the price is also finite. The market tends to overvalue or undervalue companies. Here it's crucial to avoid growth stocks as the valuation is based on future earnings. On the other hand, if a stock is undervalued, you essentially pay nothing for the additional costs. Some diversification should be applied. However, the number of companies isn't set in stone. 

Insist on a margin of safety: Every investment that you make should have it. This minimises the risk of being wrong. Price is not equal to the value of a company. The price of a company is around two-thirds of its actual value. For example, Apple's share price is around USD 220, but the company's value is $371. The expected growth is around 5.8%. Microsoft and Amazon have a share price of $108 and $1971, respectively, with values of $72 and $2115 and expected growth rates of 21.5 per cent and 74 per cent, respectively.  

Risk and reward correlation: The correlation is not always linear. The price and value of the assets are often disconnected. The minimum return goes to the passive investor, and the maximum goes to the enterprising investor. Maximising return always comes with higher risk. The academic way to go for higher returns carries higher risk. But price and value are not the same. One should go for companies with moderate risk and moderate reward. 

Focus on stock fundamentals: PE ratios, current ratios, and established sales are some essential figures. 

Identify personal preferences before investing: There is no one-size-fits-all investment. It's advisable to scale up gradually for riskier investments. Even with the advice from Sharekhan, the market trends can be unpredictable. Sharekhan's investing assistant AI tool can help recommend the best stocks for you based on your investing history and preferences. 

For a detailed disclaimer, please visit the Sharekhan website. 

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