How can investment risk and operational risk be reduced?

 Investment risk: Investment risk can be defined as the probability of occurrence of losses relative to the expected return on any particular investment. Stating simply, it is a measure of the level of uncertainty of achieving the returns as per the expectations of the investor. It is the extent of unexpected results to be realized. Risk is an important component in the assessment of the prospects of an investment.

Most investors while making an investment consider less risk as favorable. The lesser the investment risk, the more lucrative the investment. However, the thumb rule is the higher the risk, the better the return.

Some of the tools at the disposal of an individual that he/she must consider to mitigate different investment risks include:

 ·        Due diligence: It is essential that before any call on investing, research should be carried out. For example, It is pertinent that before investing in a stock one checks earning growth, PE ratio, debt load, and management team and then compares it with other stocks in the same industry on key parameters. Stocks with high PE ratios, unstable management, and inconsistent profitability and revenue growth could be eliminated. 

·        Capital allocation: Out of the total capital available for investment, assign amounts in different classes of investment such as debt, equity, or a mix of both depending on the growth requirements of capital. In case an individual starts investment at an early age, then investing in equities offering higher returns over a long duration of investment would mitigate volatility and inflation risk. 

·        Portfolio diversification: This entails the selection of various investment products, exposure to equity belonging to different sectors, and the mix of various options available for instruments. As a strategy, there could be a possibility of lower returns but would result in alleviating the risk of substantial capital loss. 

·        Monitoring portfolio: It is essential at periodic intervals. For instance, at times of lower interest, the price of debt securities moves up and could provide an opportunity for a switch in the portfolio. In case an individual cannot manage the monitoring, it is advisable to shift to Mutual Funds to protect the capital. 

·        Blue-chip stocks: In order to ease the loss of capital and avoid liquidity risk, it is ideal to stay invested in bellwether stock or fund. Investors should watch out for the credit rating of debt securities and invest in better-rated securities to avoid default risk. 

·        The quantum of money invested, period of investment, return and growth, expenses, associated with it, and risk tolerance impact our achievement of investment goals. All types of investment products/securities carry some or the other risk.

Operational risk: Operational risk summarizes the uncertainties and hazards a company faces when it attempts to do its day-to-day business activities within a given field or industry. A type of business risk, it can result from breakdowns in internal procedures, people, and systems as opposed to problems incurred from external forces, such as political or economic events, or inherent to the entire market or market segment, known as systematic risk.

Operational risk can also be classified as a variety of unsystematic risks, which is unique to a specific company or industry.

·        Get the backing of the organization's leadership. This is a critical first step. An ORM program will only be truly effective if it is championed at the very top of the organization.

·        Introduce risk accountability across the organization. Employees across every level of the enterprise need to be trained to incorporate risk-based thinking into their day-to-day activities and be held accountable for risks within their immediate area of control.

·        Agree to timely risk assessments. Risk assessments help ensure companies comply with new requirements and keep risk management a top priority. The frequency of these audits should be determined by the unique characteristics of each company and its operational footprint.

·        Quantify and prioritize risks. Managing an optimized ORM program requires that risks are quantified in terms of probability and severity, and calculated in terms of the costs and benefits of mitigating a risk versus allowing the risk to remain as is. This enables mitigation efforts to be targeted most effectively.

·        Establish appropriate metrics and key performance indicators to monitor and assess performance. This is one of the most important steps in a successful ORM program. It enables companies to ensure the appropriate effort and resources are expended based on the specific risk profile of the business.

Implement consistent, well-documented, and cost-effective controls. Such control measures are necessary to actively mitigate identified priority risks. While nearly all companies (98%) feel they already have adequate controls already in place, only about one in four (27%) considered them cost-effective, suggesting an opportunity for them to identify better options for managing and controlling identified risks