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...

Mutual Fund Review: L&T MIP

        This fund won't deliver chart-topping returns. However, over the long run it will not disappoint and end up beating the category average The fund has seen numerous changes at the helm. When Katare took over in October 2007, he made dramatic alterations to the portfolio. On the equity side, he increased the number of stocks to 11 (November) from 2 (September). On the debt side, he added Certificates of Deposit (CDs), while earlier Treasury Bills (T-Bills) and cash accounted for 88 per cent (September 2007) of the portfolio. In November 2007 he exited T-Bills for good. The results impressed. In the last quarter of 2007, it delivered 12.83 per cent (category average: 6.12%). In 2008, the first quarter performance was nothing short of impressive, a return of 9.93 per cent (category average: -3.97%). While other players increased their portfolio maturity, Katare maintained a low maturity profile. While the average maturity of the category was 2.81 years that quarter, th...

Reconfigure investments to reap benefits in DTC

    Investing for tax benefits under the new Direct Taxes Code ( DTC ) will be different in several ways from what taxpayers are familiar with right now. This will require some reconfiguration in the nature of investments for the investor and they need to be ready to tackle the changes that will come about once the new DTC is implemented from financial year 2012-13.One area of interest for most taxpayers is the manner in which they can extract the maximum tax benefit. Here is a look at the situation and also how it changes from the existing position. Basic deduction: At present, there is a deduction of Rs 1 lakh that is available for an individual when they make investments under specified areas such as provident fund, public provident fund, national savings certificates, equity linked savings scheme and insurance premium, among others. This benefit is available under Section 80C of the Income Tax Act. This has been replaced by a new Section 68 under the DTC where there is a deduct...

PF e-Passbook

  Provident Fund e-Passbook   The Employees Provident Fund Organisation now runs an e-passbook service that enables members to log in and access their provident fund accounts . This facility enables tracking of the money and ensuring that the employer's contribution has been deposited into the account. This facility is available to those whose accounts are with the central provident fund commissioner for maintenance and can be availed at members.epfoservices.in . Registration A member can register at the portal easily by using PAN , Aadhar or passport number as the log in and the mobile numbers as the PIN . This combination enables easy retrieval of information. Accounts After logging in, the member has to choose the state where the employer is located, and enter the code number of the employer, account number and name. These details can be obtained from any existing PF document . PIN To download the passbook, the member will request...

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...
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