Skip to main content

How to Deal with risk and build wealth?

Invest In Tax Saving Mutual Funds Online

Call 0 94 8300 8300 (India)


Risk is not something we understand too well. At least, not in the investing arena. We tend to club everything that is complex, unpredictable and capable of harming us, as risky. We also struggle to come to terms with risk. We focus on the manifestation of risk, not on managing it. Let me discuss three common instances of risk that I encounter frequently.
First, consider the risk of a bank deposit. Investors tell me that 1 lakh of deposit insurance is too small for the risk of bank failure. Advisers tell me that investors do not know about this tiny cover, but prefer bank deposits out of ignorance. What is being missed here is that deposit insurance is the last stop. It is evoked when everything else fails and the bank closes down. What should matter to investors is how risk can be managed in normal times. Investors should know how to choose a bank, how to avoid risky banks, and what to do when the situation gets worse.


The risk to the depositor depends on the loan book of the bank. An organisation with a good credit process and a low level of non-performing assets is very likely to fully honour its commitments. The risk to the depositor is that even the best processes may not prevent a default. To insure the depositor against this risk, banks do not fund their lending only with deposits, but also have equity capital. Equity bears the risk of the loan book so that deposits do not default. This is why capital adequacy is a big thing for banks. Since bank failures have a huge impact on the financial system, they are closely regulated to reduce and provide for bad loans and have adequate capital. The investors in bank deposits should look at these two numbers to understand how risky their bank is.


Second, consider a corporate bond and credit risk. I am frequently asked about the extent to which investors can trust an issuer and the credit rating. Some advisers tend to discount rating agencies, setting a stringent, but unrealistic, performance standard that the rating once issued cannot change. Investors focus on default and whether the issuer may fail to pay. Credit risk is not about default as a final event but the changing probability of default. A bond might show a high ability to repay at the time of issuance, but subsequent macro and business conditions may erode this ability. Investors should, therefore, worry about this change. They may be receiving an interest rate of an AA bond, but when the bond slips to A, the interest is inadequate due to the increased risk they are bearing. This is the credit risk in a corporate bond.


Rating agencies track and watch the rating and upgrade or downgrade on the basis of new information. Managing credit risk requires tracking the credit rating and acting on it, rather than assuming that there is no risk until default or demanding that credit ratings once issued should never change.


Third, consider a mutual fund. The statement, 'mutual funds are subject to market risks', remains poorly understood. Investors continue to seek a minimum return, or ask that fund managers deliver a positive return at all times. They like that the funds be moved to cash, the portfolio be modified, or a trick be performed to keep the returns positive. A mutual fund is nothing but a managed portfolio. It is a portfolio of securities. Unlike a bank that provides loans, a mutual fund buys bonds, shares and other securities that are traded on the securities markets. When it builds a portfolio, it reduces the risk of a single security or borrower. However, the overall macro risks continue to remain. This is the market risk in a fund, one that will not go away.


An investor who seeks a mutual fund is looking for market returns and bears market risks. Instead of a savings bank rate, he seeks a return from investing in the money market; instead of a term deposit or bond interest, he seeks returns from a bond portfolio. Instead of a return from an IPO or a share, he seeks returns from a portfolio of equity shares. The benefit of investing in a mutual fund is that the portfolio is less risky by design than a single security, but it is not zero risk. The market risk remains. The ongoing management of risk, which we referred to, is something that a fund manager does routinely. The risks of the securities held in a fund keep changing and it will reflect in their market prices and, in turn, in the net asset value (NAV) of the fund. Market prices won't wait for risks to manifest, but change on the basis of expectations. An investor in a mutual fund bears this risk.


Therefore, to deal with risk, we need to understand its sources. We can then ask how it is measured. We can find out who manages it and how, and then we can evaluate whether the level of risk suits our temperament and needs.

Several years ago, in his classic book, Against the Gods, Peter Bernstein pointed out that learning to manage risk, perhaps, represents the transition from traditional to the modern. The swelling river that destroyed, the sun whose setting down brought the risks of the dark, and the snake that bit one to death were all revered in ancient times as Gods. Then man learned to estimate probabilities, and to measure and manage risk. Risk never really goes away, but manifests in forms not always completely anticipated. We have to keep working on it and learn to deal with risk. Living in denial of risk or being fatalistic is unlikely to help in building wealth.

 

Happy Investing!!

We can help. Call 0 94 8300 8300 (India)

Leave your comment with mail ID and we will answer them

OR

You can write back to us at PrajnaCapital [at] Gmail [dot] Com

---------------------------------------------

Invest in Tax Saving Mutual Funds ( ELSS Mutual Funds ) to upto Rs 1 lakh and Save tax under Section 80C.

Invest Tax Saving Mutual Funds Online

Tax Saving Mutual Funds Online

These links can be used to Purchase Mutual Funds Online that are regular also (Investment, non-tax saving)

Download Tax Saving Mutual Fund Application Forms from all AMCs

Download Tax Saving Mutual Fund Applications

These Application Forms can be used for buying regular mutual funds also

Some of the best Tax Saving Mutual Funds available ( ELSS Mutual Funds )

  1. ICICI Prudential Tax PlanInvest Online
  2. HDFC TaxSaverInvest Online
  3. DSP BlackRock Tax Saver FundInvest Online
  4. Reliance Tax Saver (ELSS) FundInvest Online
  5. Birla Sun Life Tax Relief '96 Invest Online
  6. IDFC Tax Advantage (ELSS) FundInvest Online
  7. SBI Magnum Tax Gain Scheme 1993Invest Online
  8. Sundaram Tax SaverInvest Online
  9. Edelweiss ELSS Invest Online

------------------

Best Performing Mutual Funds

    1. Largecap Funds Invest Online
      1. DSP BlackRock Top 100 Fund
      2. ICICI Prudential Focused Blue Chip Fund
      3. Birla Sun Life Front Line Equity Fund
    2. Large and Midcap Funds Invest Online
      1. ICICI Prudential Dynamic Plan
      2. HDFC Top 200 Fund
      3. UTI Dividend Yield Fund
    1. Mid and SmallCap Funds Invest Online
      1. Reliance Equity Opportunities Fund
      2. DSP BlackRock Small & Midcap Fund
      3. Sundaram Select Midcap
      4. IDFC Premier Equity Fund
    1. Small and MicroCap Funds Invest Online
      1. DSP BlackRock MicroCap Fund
    1. Sector Funds Invest Online
      1. Reliance Banking Fund
      2. Reliance Banking Fund
    1. Tax Saver MutualFundsInvest Online
      1. ICICI Prudential Tax Plan
      2. HDFC Taxsaver
      3. DSP BlackRock Tax Saver Fund
      4. Reliance Tax Saver (ELSS) Fund
    2. Gold Mutual Funds Invest Online
      1. Relaince Gold Savings Fund
      2. ICICI Prudential Regular Gold Savings Fund
      3. HDFC Gold Fund

Popular posts from this blog

ICICI Prudential Dynamic Plan Invest Online

Download Tax Saving Mutual Fund Application Forms Invest In Tax Saving Mutual Funds Online Buy Gold Mutual Funds Leave a missed Call on 94 8300 8300   ICICI Prudential Dynamic Plan             Invest Online This fund does remarkably well during falling markets, but fails to show the same prowess during a rising market. The fund sticks to its mandate to adapt to the dynamic nature of the market by shuttling between debt and equity. It takes aggressive asset calls in equity when the market surges by investing in quality mid-cap stocks. At the same time, it adopts a defensive strategy by investing in debt and cash when markets get overvalued, making it a good long-term choice.     For further information contact Prajna Capital on 94 8300 8300 by leaving a missed call     Leave a missed Call on 94 8300 8300   Leave your comment with mail ID and we will ...
Read more

Financial Planner - Do Integrity & Dependability Check

How does one can find value proposition when it comes to financial planning, which is a new area? There is nothing to benchmark it with. So, how does one figure what is the right fee to pay? Look at what you want. You probably want to hire a financial planner to get a blueprint for your life ahead and want to know how to achieve your goals. For creating a tailor-made financial plan, our experience is that it takes 25-30 man-hours in all. Taking an average of Rs 500 per hour for hiring the services of a qualified financial planner like one who has a CFP(CM) certificate, the fee would come to Rs 12,500 to Rs 15,000. But the per-hour rate can be higher or lower depending on the process adopted, the experience and expertise of the planner, etc. That's how planners arrive at their fee. Now, is that value for money? For that you need to find out what benefits you would derive by engaging them. The financial plan will give you clarity, direction and pathway to achieve your goals. Th...
Read more

About CRISIL IPO Grading

CRISIL IPO (Initial Public Offering) Grading is an opinion on the fundamentals of the graded issue that reflects CRISIL's independence and expertise. This opinion is expressed as a relative assessment in relation to other listed equity securities in India. The assessment is based on a grading exercise carried out by industry specialists from CRISIL Research. A CRISIL IPO Grade 5/5 indicates strong fundamentals and a CRISIL IPO Grade 1/5 indicates poor fundamentals. CRISIL IPO Grading reflects its assessment of the graded company's equity fundamentals as distinct from an assessment of debt fundamentals. A CRISIL IPO Grade should not be construed to mean a comment on the price of the graded security nor is it a recommendation to invest or not to invest in the graded security. However, this grade is not an opinion on whether the issue price is appropriate in relation to the issue fundamentals. The grade is not a recommendation to buy / sell or hold the graded instrument, or a comm...
Read more

Mutual Fund Review: ING Dividend Yield

  ING Dividend Yield's small assets enable the fund manager to churn in impressive returns… Strategy The aim of the fund is to invest in stocks which offer a high dividend yield. This fund deploys a value based strategy which aims to gain from investing in fundamentally strong and free cash flow generating businesses. The scheme focuses not only on growth but also on the cash generated by the business, which mostly leads to stable returns even in volatile markets. This fund has a low volatility because of its investment in high yielding stocks. The scheme tries to include stocks that yield dividend above the dividend yield of the Nifty and stocks with liquidity, which throws up a universe of 150 stocks.   Our View Launched in October 2005, this fund invests at least 65 per cent of its assets in high dividend yield stocks. The fund has consistently maintained a mix of stocks across varying market capitalisation, with a higher tilt to mid caps compared to small caps. Howev...
Read more

Understanding Your Cibil Credit Information Report

   WE ARE all familiar with the anxiety and uncertainty that we feel when applying for a loan. After all, it's the lender who decides whether we can own our dream home, our first car, or whether our children can pursue higher education. In a nutshell, a better life depends on the lender's decisions.    While other factors do play a part in the lender's decision, the Cibil Credit Information Report ( CIR ) plays a crucial role in a lender's decision to approve a loan application.    Previously, lenders would treat all loan seekers equally. Each applicant, if approved by the lender's internal credit policy, would be charged at the same interest rate for a particular loan size and purpose. The lenders would charge a higher interest rate to all the borrowers, in order to compensate for the possible default of a small portion of the loan disbursed. In other words, it's like a professor (the lender) punishing an entire class (borrowers) for the mischief played b...
Read more
Related Posts Plugin for WordPress, Blogger...
Invest in Tax Saving Mutual Funds Download Any Applications
Transact Mutual Funds Online Invest Online
Buy Gold Mutual Funds Invest Now