The world today is changing at a fast pace bearing no similarity from the past. The prices of commodities ranging from medicines to household essentials are soaring high. Standing on such a scenario reclining on a single earning can be challenging for living a livelihood. So, for the second source of income, investment comes as a good option.
Investment, like any other strategy, bears the risk in it. Risk is beneficial in investment. Though sounding weird, it is true.
What is investment risk & How to manage investment risk?
Investment risk can be defined as facing losses or undergoing loss while expecting a return on any investment made. It can be said as a level of uncertainty of expected returns compared to the investor's expectations. Risk is essential. According to the thumb rule, the greater the risk, the higher is the return.
There are different types of risk associated with the investment. They are Business Risk, Non- business Risk, Financial Risk.
Financial risk is the most eminent type of risk in every business. The financial risk depends on market movements, and based on market movements, it can be classified as Market Risks, Credit Risks, Liquidity Risk, Legal Risk.
What is risk in financial management And Importance of risk management in finance.
In Financial management, too, the risk is an integral part. Financial risk has a direct impact on your cash transactions. Anything that deals with the inflow and outflow of cash in business can be termed as Financial risk. Financial risk can be anticipated with an effective Financial Management plan. Financial Management doesn't deal with eliminating the risk but points out strategies in overcoming it.
Importance of risk management in finance
The main idea is to impart which risk should be taken and which ones should be avoided. The key to Financial Resource Management programs lies in its plan of action, which involves procedures, policies and practices your business will ensure.
Apart from Financial risk, which is a crucial part of the investment, let's see how to manage investment risk.
Management is the core word in investment. One common way to manage risk is to distribute your resources across various channels instead of relying on a single platform. This is because if one sector fails, you can benefit from the other sectors. Other sectors are real estate, mutual funds or bonds.
To control risks, three ways could be followed:- Diversification, Investing consistently, Investing over a more significant period.
Diversifying refers to the distribution of your investment across varied sectors, be it technology, health care, or investment in stocks and bonds. Using investment products, protection over your investments can be ensured. This is to protect in case a market sector suffers a downfall.
Diversification implies a well-balanced investment scheme. Instead of putting the lion's share in one sector, you distribute it in various fields, thus reducing the risk of losing everything if one channel or more investment falters.
- Investing Consistently
Investing at a regular pace or frequency is recommended to avoid facing losses. This means you make a certain amount of investment (for, e.g. Rs 1000/-) in a company's stock at a regular interval. The stock's value will vary from month to month, depending on its performance, the demand for the stock and several other factors. But despite such uncertainties, you continue buying your share of the company within the stipulated amount.
With this amount one month you could purchase two shares, next month it could be just one, but to keep consistency is important. This is called consistent investing, where a certain amount of money we invested at a regular interval, be it monthly, quarterly irrespective of the market condition.
The key to consistent investment is to choose wisely by researching the company's growth, their graph of all-time high and low.
- Investing over Time
It is seen that long term investment fetches more benefits than short term. Even though the price may increase, it can also get surged within a short span. In long term investment, the losses can be incurred gradually, thus minimizing the risk of facing loss.
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How to outline the Investment Risk Management Framework?
Five essential components are considered as Golden principles of investment risk management framework. They are-
Risk Management and assessment
Risk reporting and
In risk identification, the company has to identify their risk areas, including legal, political risk, IT risk, and credit risk. After identifying their areas of risks, the company then points the risks and categorizes them into core and non-core risks. Core risks are those that companies take to perform proficiently and for long term growth.
Risk measurement informs us that either the risk is a specific risk or an aggregate risk. When the specific risk is measured, it is necessary to consider the effect of that risk on the organization's entire risk profile.
Another important aspect is the ability to measure. Some risk is more accessible to predict than others, for, eg. Market risk can be predicted by observing market prices.
After categorizing and measuring the risks, a company can then decide which risk to eliminate and how much of the core risks to maintain. Risk mitigation is done through the sale of its assets, buying insurance.
Risk Monitoring and Reporting
It is required to produce a regular report on specific and aggregate risk measures to keep the risk level minimal. Financial institutions can produce a regular report over other institutions where trading is done regularly.
It is the procedure that every company employee has to abide by to perform their duties. Risk Governance involves discharging duties to the concerned person, bestowing authority or power to the suitable candidate, committees for approval of core risk, and a general overview.
In addition to these, investment risk management pdf is well-versed with all the information required for an individual to gather knowledge.
So, we can conclude that risk is an integral and essential part of any investment made. It is necessary to manage it properly to avoid excessive leakage of resources.
We are all aware of the guideline, which states Investment Is A matter of market risk. Please read the documents carefully before investing. If we all follow adequate measures, then certainly we could take the risk and increase our resources.
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