Investment and Risk Management Tips from Alice Blue Founder & CEO Sidhavelayutham

Bangalore : The age-old adage remains true in today’s volatile financial landscape: “Higher returns come with higher risks.” While equities markets have the potential for significant gains, they also have inherent hazards. When navigating the world of investing, it is critical for investors to understand the notion of equity risk premium. Volatile and unexpected events such as the 2008 global financial crisis, the COVID-19 pandemic, and the ongoing Russia-Ukraine war highlight the need of effective risk management measures to protect portfolio gains.

Prioritising risk management above profit maximisation should be prioritised in the sphere of investing. Every investor must deal with two types of risk: market risk and company risk. Market risk is founded in macroeconomic issues such as interest rate swings, geopolitical upheavals, and economic downturns. Foreign Institutional Investors (FIIs), for example, regularly watch these data and may modify their investments on a global or national scale as a result.

Business risk, on the other hand, refers to hazards that are unique to a firm. It includes variables such as increased industry competitiveness, regulatory obstacles, supply chain disruptions, and operational inefficiencies. For example, the automotive industry’s recent holiday season experience shown how a shortfall of semiconductor supply hindered vehicle manufacturing despite strong consumer demand. Preparations for the present holiday season show that 95% of retailers have increased their stocks to match this year’s predicted demand.

Effective risk management starts with an investor assessing their risk tolerance in the context of their portfolio. To do so, investors must understand the notion of Value at Risk (VaR). VaR estimates possible portfolio losses and their likelihood of happening over a given time period. For example, if an investor declares that their portfolio’s 1-day VaR is 1 lakh with a 95% confidence level, it means that there is only a 5% possibility that the portfolio would experience losses in excess of 1 lakh on any given day.

Another important statistic that worldwide analysts regularly monitor is beta, which measures a stock’s historical volatility compared to market indexes such as the Nifty. For example, Infosys’ beta number of 1.3 implies that its price volatility is 30% greater than the market’s. As a result, if the market climbs by 1%, Infosys is projected to grow by 1.3%.

Diversification is a powerful technique for reducing company risk. By diversifying their investments outside a single industry, investors may protect themselves against stock price changes caused by variables such as interest rate volatility. Diversifying into non-interest-sensitive industries such as FMCG or pharmaceuticals, for example, might help balance portfolio-level risks.

Furthermore, investors may use derivative products such as futures and options to protect themselves against stock-specific price risks. Purchasing a protective put option, for example, may counter any losses coming from a stock price decrease.

Finally, owing to the ever-changing market circumstances, ongoing and periodic portfolio monitoring is important. A consistent risk assessment technique helps investors to manage investment risk successfully over time.

For more in-depth insights into investment and trading strategies, please visit www.aliceblueonline.com.