There are three types of risk.
Unsystematic risk can be reduced by diversifying, whereas systematic risk can be reduced to an extent only by increasing the time frame and holding the equity for a sufficiently long time.
mutual fund (Mutual FundLike while investing in a market linked product, we all need to first understand the inherent risks involved and then understand that the risk cannot be completely eliminated or eliminated, but can only be reduced or transferred. It can only be done. Transferring the risk simply means that if a person returns up to the required limit (Return) just doesn’t take the risk to get it. And if the amount received falls short of the intended amount, then he can take a lot of risk later. Mitigation of risk on the other hand means to reduce it as far as possible and thus take the result to the best level.
The two most popular risks associated with investing in equity products are unsystematic risk (focused on the sector or company) and systematic risk (risk inherent to the entire market, for example, corrosion). Many experts also highlight the difference between volatility and risk. Volatility is simply the daily fluctuations in prices, whereas risk can be considered as the inability to formulate or achieve long-term financial goals or results. Thus, equities may be said to be volatile but may not be risky, whereas a guaranteed, traditional, fixed income product may be stable in appearance but relatively risky.
reduce risk with strategy
Ajit Menon, CEO, PGIM India Mutual Fund, said, “When it comes to different types of risks, there are enough strategies to reduce the risks involved in equities. While diversifying the portfolio to a point across different stocks, sectors, investment styles, etc. can reduce systematic risk to a certain extent, only by increasing the time frame and holding the equities for a sufficiently long period of time. could. Both these considerations are included in our portfolio building process at PGIM India. We focus on Corporate Governance Standards, Earnings Track Record and Sustainability, Long Term Perspective and Capital Efficiency as these are some of the factors that ensure that the risk in our portfolio is substantially reduced.
Our second tier filter for selecting stocks is based on low debt to equity ratio, positive operating cashflows over the past cycle to downside protection that is mandated in our portfolio. We help with this by looking at various other parameters like the PEG ratio (Price/Earnings to Growth). It tells us that we are conscious about how much we are paying today for future growth potential.
A recent example illustrates our process, in which we have been able to avoid a major downturn due to some new age tech companies staying away from IPOs. Our investment filter on positive cash flow has worked in our favor in this regard.
The third type of risk that experts rarely talk about is behavior risk. This is related to our prejudices as both money managers and investors. This prevents us from looking at the data objectively and thus creates errors. Due to these sometimes there can be permanent loss of capital. One such example is the tendency to hold stocks that have declined in value due to lack of fundamentals in the hope of better returns. Popularly known as the Disposition Effect, here we sell our profitable stocks keeping our loss stocks in our portfolio.
In fact there are other aspects also which help us like Equity Research Analyst team which discusses its various perspectives internally. This behavior also works for risk reduction, as the ideas here are discussed in depth with different perspectives.
Another thing that broadens our approach is the support and input from our global teams. This help helps us to understand the events happening globally, and also helps to understand the impact on the markets more closely. All this together with quantitative filters reduce the risk associated with individual behavior to a great extent. We have discussed these filters above.
As mentioned above, our investment practices at PGIM India are precisely set up to mitigate all three types of risks in the portfolio. This can sometimes lead to relatively underperforming in the short term, but eventually the market accepts the realities and the stock prices rise in the long run along with the fundamentals. Thus, our focus remains on delivering risk-adjusted returns for our investors over the long term. Therefore, if one is comfortable with the volatility of equity linked products, but wants to mitigate any unwanted risks in investing, then having a purposeful and process-oriented portfolio will be able to do so over the long term. has a better chance.
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