Skip to main content

A diversified portfolio can lower the impact of geopolitical risk

 


   RISK is a term that has a strong role to play in your investments. Warren Buffet aptly defined risks as 'not knowing what you are doing'. To make life simpler for investors and traders, experts came out with a range of numbers within which a risk is worth taking. Some look at risk-reward ratios to decide on their investment decisions. However, there is one set of risks that is not quantifiable.

   Geopolitical risk is one such key element that investors are always exposed to. Epidemics and natural calamities such as earthquakes and floods can mar the fortunes of a country. This can adversely affect the economic growth of the nation and, in turn, hurt investors. In case of dry spells or heavy rains, an economy such as India, receives lower agricultural output and a large consumer base loses out on the purchasing power front. This impacts production numbers across industries and drags the stock prices down. Countries which are not in a position to meet their foreign obligation also pose a serious risk. A war between two countries or a civil war within a country, such as the one fought in Sri Lanka for decades, also impacts an economy as a whole. With rising integration of global economy, geopolitical risks are important.

   Another example of such unquantifiable risk is political risk, which includes change of government or drastic changes in long-term economic policies of the government. For example, the international community of investors keenly follows the government's commitment to economic reform. For example, since the 90s, successive governments were judged on whether they would continue with the open economic policies. No wonder, we are still drawing huge foreign capital because of successive governments that have pursued the reform agenda. In the past, investors have seen nationalisation of businesses and shift from democratic to dictatorship form of governments hurting their interests. For example, just imagine what will happen if insurance companies or the banks were to be nationalised immediately.


   However, though you can be aware of these risks you can't obtain an insurance cover against them. For example, if you are investing in a mutual fund scheme that invests money abroad, you are exposed to geopolitical risks. But can you do anything about the risk? Well, precious little. The best way to mitigate this risk is to have a diversified portfolio. Also, investors can invest across markets with no or low correlation with each other. For example, Latin American markets have low correlation with Indian markets. The low correlation is an outcome of contrasting nature of these economies. Latin American countries are commodity producers whereas the Indian economy is primarily a consumer of commodities. Investors should restrict their exposure to those countries whose geopolitical scenario they understand.

 


Popular posts from this blog

Mutual Fund Review: Religare Tax Plan

Tax Plan is one of the better performing schemes from Religare Asset Management. Existing investors can redeem their investment after three years. But given the scheme's performance, they can continue to stay invested   Given the mandated lock-in period of three years, tax saving schemes give the fund manager the leeway to invest in ideas that may take time to nurture. Religare Tax Plan's investment ideas revolve around 'High Growth', which the fund manager has aimed to achieve by digging out promising stories/businesses in the mid-cap segment. Within the space, consumer staples has been the centre of attention for the last couple of years and can be seen as one of the key reasons for the scheme's outperformance as compared to the broader market. It has, however, tweaked its focus and reduced exposure in midcaps as they were commanding a high premium. The strategy seems to have worked as it returned a 22% gain last year. Religare Tax Plan has outperformed BSE 100...

Good time to invest in Infrastructure Funds

Download Tax Saving Mutual Fund Application Forms Invest In Tax Saving Mutual Funds Online Buy Gold Mutual Funds Leave a missed Call on 94 8300 8300   Good time to invest in infrastructure The Sensex has gained almost 10 per cent from May 15 till date, while the CNX Infrastructure Index has gained almost 17 per cent in the period. The price to earnings ( P/ E) ratio of the BSE Sensex is 18.96; for the CNX Infrastructure Index, it is 24.57. The estimated P/ E for next year is 14.04 for the Sensex. Of the 24 companies that make up the CNX Infrastructure Index, six have a P/ E higher than 20. Does this mean infrastructure is fairly valued? Or, has it run up quite a bit? According to experts, barring stray companies, the infra sector is fairly valued and it is a good time to invest. Even if some companies are facing debt restructuring problems, once interest rates come down and regulatory norms become flexible, they will start giving good re...

ICICI Prudential Balanced Fund

 ICICI Prudential Balanced Fund scheme seeks to generate long-term capital appreciation and current income by investing in a portfolio that is investing in equities and related securities as well as fixed income and money market securities. The approximate allocation to equity would be in the range of 60-80 per cent with a minimum of 51 per cent, and the approximate debt allocation is 40-49 per cent, with a minimum of 20 per cent. An impressive show in the last couple of years has propelled this fund from a three-star to a four-star rating. The fund has traditionally featured a high equity allocation, hovering at well over 70 per cent, which is higher than the allocations of the peers. But in the last one year, the allocation has been moderated from 78-79 per cent levels to 66-67 per cent of the portfolio. ICICI Prudential Balanced Fund appears to practise some degree of tactical allocation based on market valuations. Within equities, well over two-thirds of the allocation is parked i...

Mutual Funds: Past Performance is not just everything

Many a times your agent / distributor / relationship manager tries to push you some mutual fund schemes by enticing you with a typical sales pitch…"Sir, this scheme has generated 20% returns in the past one year." And this sales pitch often gets louder when the market conditions have been favourable. Some of the agents / distributors / relationship managers have another unique way of luring you. They say, "Sir / madam this scheme has been awarded the best scheme award in the past by a leading business channel"... And hearing all these sales talks you investors very often get attracted and sign a cheque in favour of the respective scheme.   But please ask yourself do you hear these sales talks when the capital markets turn turbulent? Why is it so that your agent / distributor / relationship manager avoids talking to you during turbulent times of the capital markets and doesn't boast about returns generated by the respective funds or awards being conferred on t...

To rent or to buy a home? Is a million dollar question!!

Your financial planner can help you weigh pros and cons of whether you plan to buy home in your current city or hometown THE two giant real estate deals of residential properties in prime locations in Mumbai and Delhi made to the headlines recently. Yet, with housing prices sky-rocketing post the real estate slump in 2008 properties in cities like Mumbai and Delhi are beyond the reach of the common man. Many studies reveal that over the last year the property sales in major metros have been stagnant despite the meticulous efforts put in by the real estate developers. Now, it is not rare to find clients who come to me with the notion that today renting a house is better than buying one. Buying a house is one of the biggest financial decisions one takes in an entire lifetime and the dilemma of `rent versus buy' continues to perplex many people across salary brackets. A research conducted by the Center for Economic and Policy Research in Washington, DC estimates that the fair...
Related Posts Plugin for WordPress, Blogger...
Invest in Tax Saving Mutual Funds Download Any Applications
Transact Mutual Funds Online Invest Online
Buy Gold Mutual Funds Invest Now