Returns in Equity can appear in big lucrative figures. However, if you are seeking to get better returns in Equity investments, you must know and understand the idea behind Risk Adjusted Returns.
What are Risk-adjusted returns?
Risk-adjusted returns are returns made by your investment relative to that of the amount of risk the investment has taken over a given period of time. If two or more investments have the same return over a given time period, the one that has the lowest risk will have the better risk-adjusted return.
How to get Better Risk Adjusted Returns?
Two strategies are followed to achieve best results in equity investing. They are:
- Tactical asset allocation
- Buy-and-hold strategy
Tactical asset allocation:
In this strategy, stock market and economic conditions are taken into consideration, which is inevitable to change. This is one of the ways adjusting these dynamics can help investors achieve healthier returns with less risk.
Where as in Buy-and-hold strategy:
Investors are encouraged to invest into funds that pose less risk of change in longer period of time, where stock market and economic conditions are assumed to be static. Though future is not predictable, many investors face the loss of damaging portfolio during market sell-offs.
These are a few steps to achieve Better Risk Adjusted Returns:
- Investment risk should be measured implementing two components: beta and alpha.
- Sharpe ratio must also be determine/measured to evaluate different stocks and funds.
- Invest in funds that suits specific individual needs
- Tactical asset allocation can greatly influencing the return factor of the investment.
- Do not go for Emotional investing, as without a methodical investment strategy it can potentially hamper the fund’s performance.
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