FINQUEST

INVESTMENT
RISK
MANAGEMENT

finquest.investments
 4 Simple Steps for Reaching
Financial Independence and Retiring Early (FIRE):

Start Saving and

Investing Early

Invest in Inflation-beating
Asset Classes

Avoid Discretionary
Expenses

Keep Liabilities Low

FINQUEST finquest.investments
Investment Risk
Management
First Edition, 2022

All Rights Reserved

Rs. 25/-

Published By
EDTS Private Limited.
Parkview, Basement, 85/17, G.N.Chetty Road,
T. Nagar , Chennai - 600017.
 Investment Risk Management

An investment is made with an objective of generating a return which

beats the inflation. All Investments are subject to risk. Return and Risk
are directly proportional - Higher the return, Higher the risk. By risk, we
mean the possibility of losing the capital. If an investor refrains from
investing, he runs a bigger risk – Inflation reducing the purchasing
power of his capital. The capacity to withstand the risk is termed as
Risk Tolerance. Some investors would have high risk tolerance and
some low. An investor’s risk tolerance is usually determined by three
main factors:

1
 Risk
Need Emotions
capacity

How much can the How much will How will the
investor afford to these investments investor react to
lose without it have to earn to get bad news (with
affecting actual the investor where fear and panic?
financial security? they want to be? or clarity and
Risk capacity can (An investor control?) and what
vary based on age, who is depending effect will those
personal financial heavily on emotions have on
goals, and an investments may be investing decisions?
investor’s timeline faced with a careful Unfortunately, this
for reaching balancing act can be hard to
those goals. between taking too predict until it
much risk and not happens.
taking enough.)

2
 Types of investment risk
A Full understanding of the various important risks is essential for
taking calculated risks and making sensible investment decisions.

Systematic Risk
Systematic risk is the type of risk that is not under your control and
affects a large number of assets. Any new law that the government
passes or any new regulatory announcement that affects your
investments falls under systematic risk.

Unsystematic Risk
Unsystematic risk affects a very small category of assets. It is also
called "specific risk". For example, the price of a specific stock may
get affected due to a fire at the company's manufacturing plant.

Business risk
Business risk, also known as "stock specific risk", pertains to the risks
of a particular company or a stock. However, this risk may be specific
to a sector as often companies pertaining to a specific sector have
identical risks. For example, when you invest, you can diversify your
portfolio by holding stocks of various companies instead of just one.

3
 Currency risk
It is also called default risk. Currency risk is the risk that arises with
the change in the value of one currency against other currencies.
These risks persist for all investments done in any other currency
than your home currency and are especially prominent in the case of
short-term investments.

Credit risk or default risk

This especially concerns investors who invest in bonds and debt
instruments. A good credit score or risk means that the company or
institution will pay the promised principal and interest that they owe.
Generally, government bonds hold the least amount of credit or
default risk, whereas, bonds taken out by companies have higher
credit risk but also offer a higher rate of interest. Typically, higher the
default or credit risk, higher the given interest rate. Many rating
institutions rate these bonds and debt instruments, helping investors
determine whether the investment option is investment grade or junk

Inflationary risk
This refers to the risk that investments and cash flow will
considerably reduce in purchasing power due to inflation. The best
way to avoid inflationary risk is to invest in equities that give higher
returns than inflation over the long-term.

4
 Market risk
This is simply the risk taken when invested in the stock market. It is
taken as a form of systematic risk as it follows its own broad trends
and cycles and cannot be avoided by diversification unlike business
or stock specific risk. One way to ride through the market risk is to
stay invested for a long-term period.

Management risk
Management risk usually comes into play when investing in a mutual
fund or portfolio management services. The risk is that the fund
manager may under perform with respect to the given benchmark.
One way to avoid management risk is to invest in index funds.
However, the downside or trade-off is that it will never outperform
the market in terms of returns.

Liquidity risk
This refers to the possibility that you may not be able to sell and raise
money from investments when needed. Liquidity refers to the
readiness to sell an asset. For example, stocks are very liquid,
whereas your house is highly illiquid. The risk with illiquid assets like
real estate or fixed term deposits is that they are not very easy to sell
at the desired moment of time, if needed, due to lack of
opportunities or lock in period.

5
 Regulatory /legislative risk
This is when the lawmakers or regulators of a country pass new laws
or announce regulations that may hurt investments or the sector
that have invested in. For example, if the government takes out a law
to limit the production and usage of non-renewable energy like
thermal energy, it would adversely affect your investments in the
stocks of all coal and thermal power companies.

Interest rate risk

Interest rate risk is the risk that the value of the fixed-rate debt
instrument will decline due to the rise in interest rates. The fixed rate
will become less attractive if the base rate increases.

Political/country risk
This usually refers to the risk that a country carries due to its
unfavourable policies or social situation that may lead to increased
loss of investment. When invested, exposed to a mix of these risks
depending upon the type of your investment. Being aware of the
risks associated with an investment and weighing the potential
returns against the potential risk is important for making an
investment decision. This is essentially the approach of risk-aware
investing. The key is to analyse the potential risks to understand if
they justify the potential returns.

6
Strategies to Help Manage Investment Risk

· Re-evaluating Portfolio Diversification and Asset

Allocation:

Investors might want to consider owning two or more mutual

funds that represent different styles, such as large-cap, mid-cap,
small-cap, as well as keeping a timeline-appropriate percentage
in bonds. Those nearing retirement might consider adding a fund
with income-producing securities. Investors should beware of
overlap. Investors often think they’re diversified because they
own a few different mutual funds, but if they take a closer look,
they realize those funds are all invested in the same or similar
stocks. It is required that investors should further diversify and
should also think beyond stocks and bonds.

7
· Lowering Portfolio Volatility:

One of the easiest ways to help reduce the volatility in a portfolio

is to keep some percentage allocated to cash and cash
equivalents. This may keep an investor from having to sell other
assets in times of need. The appropriate amount of cash to hold
may vary depending on an investor’s timeline and goals. If too
much money is kept in cash for the long-haul, it might not earn
enough to keep up with inflation.

· Investing consistently:

“Make investing a habit.” It is advised to investors to invest

consistently, a bit out of every pay check, which is powerful.
There's the plain and simple fact that will be building up the
wealth, deposit by deposit. Contributing regularly enables the
investors to apply a disciplined savings approach to help
successfully build wealth over time. Investing regularly also
allows the opportunity to ease into any type of market (rising,
falling or flat) and reduce long-term portfolio volatility.

· Getting an Investment Risk Analysis:

The Financial professionals has labelled the investors’ risk

tolerance as “aggressive,” “moderate,” or “conservative”. The
term “moderate,” for example, might mean one thing to a young
investor and another to an aging financial professional. An
8
 investor might not even know how they’ll react to a market
slump until it happens. Or a person might feel aggressive after
inheriting some money but conservative after paying a big
medical bill. Identifying an investor’s current position and goals
might make it easier to create a more effective plan for the
future. This could involve identifying the proper mix of assets
and realigning existing assets to relieve any pressure points in
the portfolio.

· Requiring a Margin of Safety:

“Buy low, sell high!” is a popular mantra in the financial industry,

but actually making the concept work can be tricky. Value
investors implement their own margin of safety by deciding that
they’ll only purchase a stock if its prevailing market price is
significantly below what they believe is its intrinsic value. The
greater the margin of safety, the higher the potential for solid
returns and the lower the downside risk. The lower the number is
in comparison with the competition, the “cheaper” the stock is.
The higher the number, the more “expensive” it is.

9
Notes
 With the ever-rising costs for higher education,
plan for the future when the child is young,
which will give the time to accumulate a substantial amount of money

Steps in Planning

Deciding the time period

Start planning well in advance

Estimate the costs

List down your priorities

Plan the time intervals of saving

Be prepared for any

unexpected requirements

Plan well and give your children the best.

FINQUEST finquest.investments
About us

“Financial Literacy is an invaluable skill for any individual to have”

Ours is an initiative to provide educational content which would help you in making informed decisions
financially. We have launched a website finquest.investments to cover personal finance and Investment
topics. It has a compilation of useful articles which you can read through by spending just 5 minutes of your
time. Please have a look at the website and subscribe to get regular updates. We welcome your feedback on
the content and topics which needs to be covered.

Happy Reading!

Team finquest.investments.

EDTS Private Limited.

Phone : 044 - 2814 3044 Email : connect@finquest.blog Website : finquest.investments