How does the Risk Management Framework work?
Investing in equity is associated with a certain amount of risk. Also it is the well-known fact that higher risk can fetch higher returns. But taking too much risk without being cognizant of the consequences can negatively impact the portfolio. Hence it is important to know the risk and take steps to manage it.
Risk management framework is the process which allows us to balance the risk. With it, we can identify the existing and potential risks to the business and plan accordingly to manage them in a prudent manner. This is a very vital process that protects the invested capital and maximises our odds to fetch better risk-adjusted returns.
Though the risk management framework does not reduce the risk to zero, managing these risks by taking informed decisions definitely cuts down the risk to a larger extent. Hence it is extremely essential to implement this strategy carefully before investing in the stock market.
“Risk comes from not knowing what you’re doing” – Warren Buffet
Risk Identification
We scan all the portfolio companies along with prospective companies and try to identify the potential risks that they can face. These include business risk, operational risks, regulatory risk, political risk, cash flow risks, corporate governance risk, balance sheet risk etc. We try to identify the fragilities of these companies and any potential risk on future earnings due to the above mentioned risks type.
Risk Measurement
Measuring the extent of risk is as important as identifying the risks. It gives us the probability of loss that the portfolio can face due to such risks. So once these risks are identified, afterward we categorize them into systematic and unsystematic risks. This categorisation helps us in constructing the portfolio and minimise the diversifiable risks. We focus on investing in only those companies that lie into our circle of competence and suit our investment framework.
Risk Mitigation
Once the risks in the invested companies /portfolio are identified, we try to mitigate them at portfolio level. The major practices that we follow are portfolio diversification and diligent monitoring on an active basis. We diversify in more than 35 – 40 companies while designing the portfolio. The large basket of companies ensures that the portfolio is well diversified between industries, themes and companies with lower correlation among them.
The Brighter Mind Approach
We, at Brighter Mind, design our portfolio in such a way so as to get better returns with minimal risks. Our team continuously strives to manage the risks effectively so as to provide maximum protection to the invested capital.
To achieve the minimal risk to our portfolio, we have developed our own risk management framework. This includes identification of risk, measuring and monitoring such risks, and mitigating these risks promptly. Our risk management framework adds immense value in strategizing our portfolio composition.
We believe that equity is a long term game. We never get perturbed by short term market volatility as we have conviction in our investment & risk management process. Our portfolio is designed with owners’ mentality i.e. being partners in the business. This protects us from short term volatility of the market and we can make more rational decisions towards our portfolio management.
