Minimising Risk Exposure In Investment

Every investor wants to guard himself from the risk. This can be done by understanding the nature of the risk and careful planning. The following paragraph gives an agenda for protecting the investors from the different types of risks:

Market risk protection 

1. The investor has to study the price behaviour of the stock. Usually history repeats itself even though it is not in perfect form. The stock that shows a growth pattern may continue to do so for some period. The Indian stock market expects the growth pattern to continue for some more time in information technology stock and depressing conditions to continue in the textile related stock. Some stocks may be cyclical stocks. It is better to avoid such type of stocks.

2. The standard deviation and beta indicate the volatility of the stock. The standard deviation and beta are available for the stocks that are  in the indices. The National Stock Exchange News bulletin provides this information. Looking at the beta values, the investor can gauge the risk  factor and make wise decision according to his/her risk tolerance.

3. Further, the investor should be prepared to hold a stock for a period of time to reap the benefits of the rising trends in the market. He should be careful in the timings of the purchase and sale of the stock. He should purchase it at the lower level and should exist at a higher level.

Protection against interest rate risk 

1. Offering suggested solution for this is to hold the investment to maturity. If he sells it in the middle due to fall in the interest rate, the capital invested would experience a heavy loss.

2. The investors can also buy treasury bills and bonds of short maturity. The portfolio manager can invest in the treasury bills and the money can be invested in the market to suit with prevailing interest rate.

3. Another suggested solution is to interest in bonds without different maturity dates. When the bonds mature in different dates, reinvestment can be done according to the changes in the investment climate. Maturity diversification can yield the best results.

Protection against inflation 

1. The general opinion is that the bonds or debentures with fixed return cannot solve the problem. If the bond yield is 13 to 15% with low risk factor, they would provide hedge against the inflation.

2. Another way to avoid the risk is to have investment in short term securities and to avoid long term investment. The rising consumer price Index may wipe off the real rate of interest in the long term.

3. Investment diversification can also solve this problem to a certain extent. The investor has to diversify his investment in real estates, precious metals, arts and antiques along with investment in securities. One cannot be sure that different types of investments would provide the perfect hedge against inflation. It can minimise the loss due to the fall in the purchasing power.

Protection against business and financial risk 

1. To guard against the business risk, the investor has to analyse strength and weakness of the industry to which the company belongs. If weakness of the industry is too much of government interference in the way of rules and regulations, it is better to avoid.

2. Analysing the profitability trend of the company is essential. The calculation of standard deviation would yield the variability of the return. If there is inconsistency in the earnings, better to avoid it. The investor has to choose a stock of consistent track record.

3. The financial risk should be minimised by analysing the capital structure of the company. If the debt equity ratio is higher, the investors should have a sense of caution. Along with the capital structure analysis, he should also take into account of the interest payment. In a boom period, the investor can selector highly level company but not in a recession.