Maneuvering Market Risks – Peppystores

Everything in life involves risk. The same applies to your investments. It’s important to note that the point isn’t to discourage you, but to talk about the risks of your investments, it’s about having the right perspective. Even if you are not aware of it, there are many risks. But if you are aware of this, you will be better informed and able to think about mitigation.

The biggest and most common is volatility risk. When you invest in the markets, be it stocks or any other market, price levels are bound to fluctuate. In some markets, such as stocks or gold, the level of volatility is relatively larger, while in others, such as bond markets, it is relatively smaller. In some markets like real estate, price discovery does not happen every day, so the level of volatility is less.

Aside from general measures of market volatility, how do you measure volatility in your portfolio? There’s a concept called mark-to-market, which indicates the price you would realize if you sold your portfolio or sold that particular holding. Note that it’s “if”, meaning you don’t actually sell your portfolio every day; it is just a metric that is reflected in your inventory. You don’t need to get overly excited during periods of negative volatility.

The perspective for you here is the level of volatility that the market has experienced historically. Unless this market changes fundamentally and as long as the fluctuations are within the range, you should stay. Then what is the mitigation for this risk? Time is a critical factor in mitigating the effects of volatility. As long as you have time on your side and are not in a hurry to get out of this investment, there is no need to worry. Not only does time heal emotional wounds, so does market corrections. This begs the question for you, “What is a reasonable time frame to take care of temporary market turbulence?”. The reference point here is 10 years, and if you can make it longer, say 15 or 20 years, not only are you safe, but you can expect decent returns.

time horizon

The other question for you is: if the time horizon is not that long, but five years, what should you do? Then exposure to relatively more volatile assets like stocks or gold should be a smaller part of your portfolio and relatively more stable assets like fixed income should be higher. The reason is that volatile stocks like stocks can give you great returns over a five year period if they are on the right side, but on the wrong side it wouldn’t hurt you much.

The next major aspect of risk is the credit or default risk inherent in fixed income securities. There is no risk of default with stocks as your returns are determined by market price movements. With fixed income, your money is due when someone matures: bonds mature by the issuer, deposits by the bank or company, and the like.

Here the mitigation factor is the profile of the entity your money is due from. There are certain government or semi-government institutions that are very secure

The Reserve Bank of India issues bonds and the small savings schemes are managed by post offices; these are all part of the machinery of government.

With banks, you have to look at the ownership and performance profile. Public sector banks are safe because of government ownership, although protection of funds is not a stated guarantee. Among the private banks, there are the leading ones that are doing well and are safe.

In the area of ​​cooperative banks, problems have arisen in relation to the safety of deposits; therefore you must be careful. Bank deposits up to ₹5 lakh are backed by the Deposit Insurance Credit Guarantee Corporation.

In addition, the profile of the bank should help you with your decision. Then there are deposits, which are accepted by certain companies, and bonds, which are issued by different types of issuers. The parameter you should pay attention to is the credit rating. “AAA” is the highest credit rating for best quality, followed by “AA” and so on.

In addition to direct investments in stocks or bonds, you can also invest through mutual funds (MFs). This reflects the volatility risk in your statements. Returns are calculated based on your funds’ net asset values ​​(NAVs), which reflect the market price on that day and the securities in the fund’s portfolio.

With a short holding period, the market movement may or may not be in your favor. Over a long period of time, market cycles play out and things level out. You don’t have to check your deposit statement every day.

Check it regularly, say once a month. As long as you are clear about your investment horizon, just persevere. For fixed income funds, you can look at the credit rating of the instruments in the portfolio ie AAA, AA etc. which reflects the credit quality.

Some debt funds have government bonds that are safer than even AAA-rated instruments.

other risks

There are certain other types of risk in portfolio construction that you should keep in mind. One is concentration risk. The point here is that your portfolio is spread across a relatively smaller number of instruments, which means that you’re exposed to that degree of risk if something goes wrong with a particular stock or bond.

MF portfolios are already spread across a sufficient number of securities so you don’t have to buy into too many funds.

If you do the portfolio construction yourself, you should buy instruments across categories and have an optimal number. Liquidity is another aspect to consider if you need access to funds ahead of maturity or intended holding period.

Investments such as RBI bonds are non-redeemable. You can sell stocks or stock MFs at any time, but if your holding period is short, your returns will be subject to market movements.

(The author is a corporate trainer and author)