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Equity Markets and types of Risk Overall RATE RATE (5.00)

We are often told that equity investments are subject to risk. What is this risk? It means earning less than what you expected from a given investment or losing part of what you invested. When it comes to investments we only talk about returns. We do say higher the risk higher will be the return. How easy it would be then to assess a mutual fund if they publish them along with their returns performance, the risks involved in earning such returns.




For example, a fund gave 25% return by risking and losing your capital to the extent of 5%, and another gave 50% return by taking the risk of losing 100% of your capital. In the absence of risk figures, you would rate the fund that gave 50% return as better than the one that gave the 25% return. However, within the risk parameter, you would prefer a fund that risks 5% of your capital to one that risks 100% of it.


Investor mind


Investors solicit advice in short tell us what to buy or sell, they say. But we cannot make a significant amount of money if we avoid taking risks. Risk is also an opportunity, but it should be a calculated risk you take. If the fear of losing makes you leave the money idle or put in low-return instruments, then inflation will devalue it. Hence, investment is must, and the risks associated with it must to be understood.


In an ideal scenario, the investor should need to take only risks relating to the economy and company performance and our markets are close to achieving this goal.


There are several parameters that evaluate the risk factor. Statistical and analytical tools can be used, but they are not affordable for the small investor nor would they always have the time or knowledge to use them. This article lists the parameters that go into risk calculation. Risk can be minimized if we can identify it.


Risk is related to time. The first question to ask while making an investment is, When do I need the money? In general, you can take more risk if your investment horizon is distant. This is because you have more time to recoup your potential losses along the way. Major factors that determine risk are stated below.


Macro factors that add to risk are the economic performance of the country.


  • The GDP growth of 8% + in the last few years has fuelled the stock market rally.


  • The Reserve Bank of India controls interest rate movements and each time the Reserve Bank changes the benchmark rates of interest it has a positive or negative impact on the market.


  • The dominance of FIIs in India has also led to a sensitivity of the market to interest rate cuts, announced by FED in the US.


  • International developments, such as energy prices, WTO, insurgence and wars between countries also impact risk, since such issues affect share prices.


  • Regulatory changes such as Truck overloading norms, Intellectual Property Rights, and VAT also add to risk directly if the company is part of such an industry and indirectly, if such changes impact all industries in general.


  • The feel-good factor is also necessary to keep the market sentiment buoyant; if everyone feels that the economy is doomed then there is little one can do to improve market sentiment.

Industry-level risks:


  • The state of a specific industry, whether it is in growth, maturity or decline phase. Industries such as IP telephones and cell phones are in the growth phase whereas certain type of asbestos sheets manufacturing, which is a health hazard, is not.


  • Industry cycles are also important: for example, in the monsoons, there is less demand for cement compared to the rest of the year.


  • Structural changes and paradigm shifts in an industry should be observed, such as people's current preference for motorcycles compared to scooters, or landline phones versus mobile phones or electronic encyclopedias versus printed books.


Company-level performance risk:


  • Company value sets and governance norms, whether it has a dominant position in the industry financial parameters, such as earning per share (EPS), whether it has short-term or long-term approach to growth.


  • Its quality of management and corporate governance are important. Infosys carries one of the lowest risk parameters as far as corporate governance goes since it is one of the best-managed companies in its kind.


  • If the company is listed as a Z group share or in Trade-for-Trade settlement, then it is a clear indication that either the company is not fulfilling the listing requirements or there is unusual activity in the market in relation to the share, and the stock exchange has put it under special surveillance.


Regulatory risks associated with markets are also important.


  • If the quality of regulation is poor then the response to scams is also not adequate. While scams and market manipulation will continue to happen as long as there is human greed, how regulators and the entire legal system respond to them is important.


  • Timely prevention, early detection, speedy and severe punishments act will deter potential manipulators. Regular reviews and correction of outdated laws ensure compliance from citizens.


Systemic risk relating to stock markets, such as that to do with the technology, needs to be understood. Today, the markets are heavily dependent on complex systems that run through public and private networks; inability to square off an open position during the closure of the market is a major risk.


Please read the Risk Disclosure Document that is available with brokers to understand such risks. Successful investing would require you to study prospects and project earnings, P/Es and market prices versus today's levels, risk /return benchmarks are necessary to review when either is achieved. Avoid greed for more profits or fear of incurring losses. Be rational rather than emotional. Sleep over a decision, if necessary. Haste can make waste.


In summary let us remember, No risk No return, No pain No gain.


Take small steps, Ask for advice, read books, Use Internet. But don't give up on investing because a film tells you so or your cousin's neighbor's uncle's co-brothers friend in Jumri Tallaiya said he lost his shirt in the markets! Own your decisions and learn from your mistakes. They are the best teachers!



Written By:


Deena A. Mehta

Managing Director

Asit C. Mehta Investments


Written by : blog admin

What's your Investment Strategy? Overall RATE RATE (0.00)

How open are we to take risks? A simple experiment would suffice to yield revealing answers. If we were to ask same-sex twins the same question -- “If they had to decide between a sure win of Rs 30, a 20 per cent chance of winning Rs 500 or a 50% chance of winning Rs 100, What would they choose?” - their answers could be very different. Any two people's approach to risk-taking is different even if they happened to be siblings. The appetite for risk differs significantly from person to person and from time to time. One has access to much more information today - many websites help assess one's risk profile - and therefore we do tend to change our minds more often.


Your risk appetite determines the type of companies you select for investment. Your investment strategy is largely dictated by your attitude towards risk. Are you a conservative, a moderate or an aggressive investor? We propose to discuss various strategies for stock selection based on your perception of risk.


There are those who are extremely risk-averse and would like to go for near fixed returns investments. These investors constantly look for strategies where the downside of risk is minimal, they would opt for high-dividend paying companies or companies with large payout ratios. They would go in for companies with a good record of profitability so that there is regular payment of income, as with fixed-income bonds. Safety-conscious people also prefer companies whose book value is greater than the share price. They view these shares as cheap since they get more value than the price they paid. Stocks with low price earnings are also seen as a steal since there is lot of room to grow.


The moderates look for good companies that have a track record of growth in terms of sales, assets and profitability. These companies are well managed and follow good governance practices.  They look for growth within all financial parameters, and not necessarily dividends alone. They look at rewards from the share market in terms of price appreciation rather than payments from the company. This group also tracks the shares of good companies, and if a sudden drop in the market brings down the price of their favorite share disproportionately, then the share becomes a good buy. They will purchase more at low prices to reduce their average holding cost if they already have stocks in their portfolio. Small and mid cap stories are also of interest to this group since they are looking for Reliance in the making.


The aggressive are those who want to be on the fast track. They are with the momentum of stocks. They spend a lot of time ascertaining the high and low of the dominant market players and try to ride the wave emerging out of sentiment-driven activities. They are looking for low-priced stocks where nominal investments would give large returns. This group of investors is on the lookout for early news on developments and material information on companies, in their case even rumors could influence the share price.


Somewhere between these three groups are those who believe in a more passive investment strategy, who regard equity investments is must in their portfolio. They buy what they believe to be good company shares and then do not do very much with them.


Each strategy has its pros and cons. A company may appeal to one investor in some aspects, but not to another investor. A high-dividend paying company, a plus point in a conservative buyer's eyes, would not find favor with someone who believes that the company should be reinvesting and growing rather than giving away cash to shareholders. He would look at the share market to give him returns on his investment in the form of appreciation in share price. Similarly, momentum of stocks would appear too risky to the conservative investor.


Irrespective of your attitude to risk, there are certain simple rules that should be observed when selecting stocks. After all, if we take pains over relatively simple purchases, such as a television set or washing machine, then the companies in which we want to invest too deserve careful scanning. You could list them according to ``fastest growing'', ``highest dividend-paying' or momentum stocks. Many websites provide such information for virtually no cost. Once this list is prepared, apply the general rules for stock selection. Look for good fundamentals, such as growth in sales, assets and profits. Corporate governance and good management are a must. A three to five year history of survival provides reasonable confidence in its staying power, unless you are a venture capitalist. Thorough research on the target company goes a long way for even if your basic assumptions are belied and you have to hang on to your holding for a long time, your investment does not become worthless. 


In the short run, it is the collective psychology of the market participants that drives the prices of shares. Very often, good results bring down the share price since the market too was expecting this, and discounts it when it does occur. A new story would impact the price to go up or down. When unfavorable news is expected, that leads to a price rise since the worst is over and better things can now happen to the company. Unbelievable as it may sound, each investor's perception drives the market collectively.


Often, the man on the street finds the market very confusing. My suggestion is to follow your instincts. Basic common sense is the best approach to investments. Do not buy a share that does not appeal to your intellect and good sense. Nobody, obviously, puts all his or her money into one company. Naturally, we do not put the school fees or the money from which the next meal will come in any market. Let's try and keep investing a happy, safe and profitable exercise.


Written By:


Deena A. Mehta

Managing Director

Asit C. Mehta Investment


Written by : blog admin

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