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Investors when asked about risk, mostly focus on principal risk and in many cases, confuse volatility with loss of capital.
Let us begin by understanding volatility, the standard deviation of a stock’s annualized returns over a given period. Simply put it shows the range in which stocks price may increase or decrease.
Volatility is not necessarily a bad thing, you don’t hear about people complaining when their fund gives 20 percent or 30 percent, they sit back and enjoy as their investment grows. Numerous reasons make funds volatile; however, one should take note that all the eye-catching headlines in the news about high teen returns are also due to volatility.
An Investor who truly understands market volatility will see downside volatility as an opportunity and deploy further as great businesses are available at discounted prices and patiently wait for the price to move back to its intrinsic value. It is necessary to take precautions however just because a stock is available at lower prices doesn’t mean it’s a good investment. If you are not sure which stocks to invest in at times like these, you can invest in PMS where the fund managers pioneer in bottoms-up stock picking. If you are not sure which PMS to invest in kindly look at our blog “How to select the best Portfolio Management Service?”
Portfolios holding 30 to 50 stocks in the fund mislead investors in the name of diversification, investors need to understand the increase in the number of stocks beyond a certain point not only does it not reduce risk but also dilutes the possibility of better returns.
PMS funds with 15 -22 stocks are concentrated enough to give better returns and diversified to mitigate idiosyncratic risk.
Ex: If Fund ”A” holds 50 stocks let’s say the highest weight of a stock is 2%, now if the stock moves up by 100% your portfolio’s performance contribution from that stock is just 2%. Fund “B” holding 20 stocks with weightage to that stock of 8%, now the contribution from that stock is 8% to your overall portfolio’s performance.
Investors confuse volatility to downside risk and mistake investments in PMS are risky and are for high-risk appetite or aggressive investors. But with basic understanding of volatility in stock market and with the fund managers that pioneer in bottoms up stock picking investors may take advantage of concentrated portfolio that is diversified to mitigate idiosyncratic risk and at same time generate better returns.
We at Right Horizons have taken things up a notch with strategies tailored to cater specific investment mandates suitable for varied risk appetite investors. Strategies starting from large cap, mid cap and small cap to strategies based out of AI framework.