How to manage the risks in the equity market?
There are various types of risks associated with investing in the equity market. These risks influence the overall portfolio returns and cause actual returns to get deviated from the expected returns.
Many of these risks are unpredictable in nature, but the good thing is that most of the risks in the equity market can be managed by following a systematic approach.
For instance, market risk is present due to volatility in the whole market due to external factors. Investing with a larger time horizon can mitigate the market risk to a large extent.
Next, business risk can be managed by investing into quality businesses that have credible track records and little disruption. Diversification will ensure that your portfolio will not suffer due to the below average performance of any single company or industry.
Behavioural risk can be minimized by having good knowledge about the invested company and ignoring the noises of the stock market. For this, help from a good investment manager can be taken to make rational decisions in investments.
All these risks in the stock market are either time-bound or awareness based and can be eliminated to a large extent.
“Everything in life has some risk. What you have to be cognizant of that and act accordingly”
The Brighter Mind Approach
We, at Brighter Mind, believe that Warren Buffet’s thought process of Risk as “Risk is not knowing what you’re doing” is quite apt. At Brighter Mind, we believe in calculated risk.
We look at India as the world’s growth engine for a very long period of time and can become much bigger in its economic contribution to the world’s GDP. India is at the cusp of an exponential growth phase. As per UK-based CEBR forecasts, India is likely to become the world’s third largest economy by 2030, overtaking the UK in 2025, Germany in 2027 and Japan in 2030. This has enormous wealth generating potential for Indian Corporates and for participants in this growth story.
In order to generate significant wealth, one needs to participate in India’s growth story. We believe that equity is the best way to be part of this journey of India which has potential for generating good inflation-adjusted return than any other asset class.
At Brighter Mind, we believe in riding this growth story via high quality companies having scalable business models, superior management quality which are available at good valuation with significant margin of safety.
Also, equity is not at all risky if the investment is done in high quality companies with the owner’s mind-set, provided it is done for a longer time horizon. In fact, it can give higher return on capital over a longer period as compared to any other asset classes and can significantly beat inflation.