Equity investments have long been the foundation for wealth creation, but for high-net-worth individuals (HNIs), optimising returns while mitigating risk requires a more nuanced approach. Primary strategies such as long-term positions or simple diversification work but aren’t sustainable enough to generate substantial wealth in a relatively shorter period. For higher returns and an elevated equity portfolio, investors must deploy advanced strategies that include market insights, flexible risk management, and asset optimisation.
Let us see some prominent advanced strategies for equity investments.
Sector rotation is an effective way to elevate your profits in equities. Different sectors perform comparatively better than others during market phases. Sectors like manufacturing and FMCG often outperform during economic expansion, while pharma holds steady, making it a defensive sector during bearish trends.
For example, allocating funds to tech and industrial sectors increases the probability of superior returns during a growth cycle. In contrast, during recessionary times, focusing on defensive stocks aids in balancing portfolio stability. Monitoring market cycles and adapting your holdings to evolving trends help optimise market returns. HNIs can rely on economic indicators and expert market professionals for the best results in selected sectors.
Factor-based investing entails deploying a data-driven approach to equity investments. This strategy includes factors like momentum, value, quantity, and quality based on their historical data. These indicate an asset's propensity for higher returns or reduced risks.
For instance, an investor could allocate a part of their portfolio to value stocks priced lower than their fundamentals. Statistically, value stocks usually outperform when the market recovers. Investors can take advantage of these factors and select assets that align with their financial goals.
Dynamic asset allocation is a flexible approach that provides short-term adjustments in equity and overall asset allocation based on evolving market conditions. DAA entails making periodic shifts to take advantage of short-term financial opportunities.
For instance, if geopolitical events point to potential market corrections, investors must reduce exposure to volatile assets and invest in bullion exchange-traded funds.
While diversification remains fundamental for reducing risk, concentrated bets on high-conviction stocks can boost profits. These are holdings in select companies with growth potential based on thorough analysis by professionals like HDFC Tru.
For instance, a high-net-worth investor might allocate a sizable portion of their equity portfolio to tech companies during a bullish market, leveraging their potential to grow as a company exponentially due to global demands and trends.
Hedging is an extremely vital component of risk management while deploying advanced equity strategies. Using instruments like options and futures contracts, investors can hedge against potential bearish trends without liquidating equity positions.
For example, purchasing a put option on an asset you hold allows you to sell it at a pre-fixed price, limiting potential losses. HNIs can deploy strategies like covered calls, which generate profits by selling call options on stocks they already own. This effectively enhances returns in a flat or sideways market while seeking incremental gains without actively trading.
Environmental, Social, and Governance (ESG) investing is becoming increasingly popular among HNIs. While ESG-focused equities were considered niche, they are now proving to be powerful components that deliver long-term returns. Studies show that companies with strong ESG metrics frequently outperform their peers, particularly in vulnerable regulatory and consumer scrutiny-based sectors.
For HNIs, including ESG principles in advanced equity investing strategy aligns with financial gains and reduces long-term risks of environmental regulations and corporate governance issues that could reduce shareholder value.
Equity investing no longer uses conventional wisdom but deploys advanced sophisticated strategies to boost profits and manage risks. Sector rotation, factor-based investing, or dynamic asset allocation are all strategies that offer avenues to optimise the market, while hedging with derivatives or focusing on ESG investments adds further depth to a well-rounded and diverse portfolio.
At HDFC Tru, we understand that markets will behave irrationally from time to time, but with strategies like dynamic asset allocation, investors can tactfully navigate through this uncertainty while growing their wealth. A SEBI and RIA complaint advisory service that helps HNIs achieve their financial goals with our customised strategies for high-volume capital.
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