Addressing the above-mentioned risks requires robust risk management strategies in portfolio management, which involves identifying, assessing, and mitigating risks. This is where the expertise of top portfolio management companies in India or a dedicated PMS company in India can be invaluable. These firms use diversified strategies to manage risk, such as:
- Diversification: Spreading investments across different asset classes, sectors, industries, and geographic regions. Purpose: Reduces the impact of poor performance in any single investment or sector on the overall Diversification spreads risk and enhances stability.
- Asset Allocation: Strategic distribution of investments among different asset classes (equities, fixed-income, cash, ). Purpose: Balancing risk and return by adjusting the allocation based on market conditions and the investor’s risk tolerance. Proper asset allocation ensures the portfolio is not overly exposed to any single asset class.
- Stop-Loss Strategies: Setting predetermined price levels at which specific securities will be sold to limit losses. Purpose: Prevents significant losses in case a particular investment’s price falls below a certain threshold. Stop-loss orders are executed automatically when the security’s price reaches the specified level.
- Hedging: Using derivatives like options or futures contracts to offset potential losses in the Purpose: Protects the portfolio from adverse market movements. For example, a portfolio manager might use options to hedge against potential declines in the value of the portfolio’s holdings.
- Stress Testing: Evaluating the portfolio’s performance under various adverse scenarios (market crashes, economic downturns).Purpose: Helps portfolio managers assess how the portfolio might perform under extreme conditions and make necessary adjustments to mitigate potential losses.
- Liquidity Management: Ensuring that the portfolio maintains sufficient liquidity to meet investor redemptions and unexpected market Purpose: Avoids the need to sell illiquid assets at distressed prices, preserving the portfolio’s value during market downturns.
Knowing the types of risks and understanding the concept of risk and return can guide you in selecting the right PMS service in India, tailored to match your risk tolerance and investment objectives.
At Aequitas, we are cognizant of these risks associated with the asset class that we operate in. We have a very disciplined approach for portfolio construction and being value investors, all our investment decisions factor in a significant margin of safety. Our in house research team with their process driven approach analyses and monitors companies to identify and mitigate company specific risks including corporate governance concerns.