Risks affecting your portfolio
Post Union Budget 2018, the roller-coaster ride in the market have taught investors that nothing is going to be easy in the investment arena. To gain one need to take risks, but before that the investors should know the risks affecting their portfolio. So let's just explore what are the risks involved in this investing world and how can we mitigate them.
On the basic level, risks are divided into two broad categories, Systematic risks and Unsystematic risks.
Systematic Risks
Systematic risk is the risk which leads to variation in returns owing to the market and macroeconomic factors. These factors include changes in the government policies, any natural calamities or any risks arising out of the geopolitical environment. For example, recently markets have reacted adversely with reference to the Karnataka elections results. Another example can be the conflict between North Korea and the US, which has affected global markets badly though India is on the economic growth path. From the above examples, we can clearly see that these are the risks on which investors or the fund manager or investment managers don’t have much control, so we can say that these are the market risks.
Mitigating these risks entirely may be difficult, but by designing an effective portfolio one can escape this risk. That is effective asset allocation of the portfolio by diversifying across various asset classes like equity, debt, gold will be helpful to reduce the impact of these risks on the portfolio.
Unsystematic risks
Unsystematic risk is the risk which is concerned with the specific stock or sector. This risk arises due to the inherent risks involved in the business with the changes in the fundamental attributes. For instance, in the case of pharma companies, there is a risk of a sudden cancellation of drug approval or issuance of warning letter on the plant which indeed affects the business of the company. The recent example of this can be the blue-chip stock Bharat Electronics which faced a drastic fall in price due to the delay in one of its big deal.
To mitigate this kind of risk investors are advised to be wise and keen while selecting an instrument or stock for investment. However, being a mutual fund investor one should always keep an eye on the stock selection of the fund manager as well as should also look into the portfolio composition and evaluate the diversification across the sectors and different market caps.