What are the Risk Measures and Management Strategies

Tags: Wealth Management, Investment Lesson, Mutual Funds, Mutual Fund Basics, Stock market, Budget, Finance, Investing, Personal Finance, Investment, ETFs, SIP, Multi cap

Many of the risks cannot be eliminated, and the investor must take some of those, in order to earn decent returns on one’s investment portfolio. However, one needs to manage the risks that one is taking. One may consider the following strategies for management of the investment risks:

• Avoid

One may avoid certain investment products if one does not want to take the respective risk. However, this may also mean giving up the opportunity to benefit out of the said investment. Many experts recommend that one should avoid the investment avenues that one does not understand.

• Take a position to benefit from some event/development

An investor can also take an investment position in anticipation of some developments in the market. Let us take an example here: a bond investor expects the interest rates to go down. In such a case, one may sell the short maturity bonds and invest in long maturity bonds. If the interest rates move down, the investor’s judgment would be rewarded handsomely. At the same time, if the judgment is wrong, there could be losses, too. This is an example of managing the interest rate risk.

Similarly, some investors manage their investment portfolios using such strategies across multiple asset categories.

In order to take and dynamically change such positions, the investor must have superior knowledge than a large number of investors in the market. This is difficult and hence risky. Due to the amount of skill required, and the risks involved, such strategies are not recommended for a large number of investors.

• Diversify

While the previous strategy is possible when one has superior knowledge, not everyone would possess the same. For a lay investor a prudent approach would be to diversify across various investment options. This spreads the risk of loss and thus the probability of losing everything can be significantly reduced through diversification.

Before managing the risks, the risks have to be measured. Measurement of credit risk is undertaken through credit rating and credit spreads. Risks related to volatility in prices, primarily the fluctuations that happen in investment returns are measured through variance, standard deviation, beta, modified duration.

Disclaimer:        

The information set out above is included for general information purposes only and is not exhaustive and does not constitute legal or tax advice. All complaints regarding Mutual Fund can be directed towards visit www.scores.gov.in (SEBI SCORES portal). Readers are requested to make informed investment decisions and consult Chaitanya Financial Consultants – 9000628943 / mfd.mmr@gmail.com to determine the financial implications with respect to investing in Mutual Funds.

Mutual Fund investments are subject to market risks, read all scheme related documents carefully.

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