Risk and Volatility.

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Investors generally say they are risk-averse as far as financial matters are concerned, but are they? But the thing is, how do they calculate the risk of their portfolio, in which they have employed their hard-earned capital? Generally, investors are lured by high and moderate returns in this asset management industry, but investors forget that with high returns of outcomes, it possesses high risk, which is uncalculated many times. On the other hand, investors observe the fund management history or track the fund manager's style for high returns, but those facts are based on past results. Stakeholders at large mostly forget the future prospects of their investments, as God knows where they will go.


As per research as of now, out of total asset management companies in India, only 32.13% have generated returns greater than the NIFTY Index. It means investors pay higher commissions to fund managers for more than 67% of these companies. For instance, if your fund manager cannot give you more returns than the NIFTY Index, you should opt for index funds. These funds track a specific index and take a very low commission. So, if you are going with actively managed schemes that have a high expense ratio, ensure that you are beating the index return at least by that expense percentage.


There are two types of risk involved in the portfolio: systematic and unsystematic risk. Systematic risk is by default in the portfolio component; as such, it cannot be eliminated by the diversification process. If we further subclassify the systematic risk, it can be determined as market risk, interest rate risk, and purchasing power risk. Unsystematic risk can be eliminated by the diversification process. It mainly consists of business risk, financial risk, and default risk, but the question is: how is risk calculated? It is computed on the basis of one formula that is the standard deviation. Here I am to convey the common parlance between risk and volatility, that is, how risk is volatile in nature and volatility is computed on the basis of the beta formula. The beta of a portfolio measures the sensitivity of the security with reference to a broad-based market index. Sensitivity implies how a particular script behaves with respect to market index movement.

Rational investors should focus on the risk and volatility of the script rather than observe the past performance as such. After the pandemic, retail investors have pumped a huge amount of capital into the Indian domestic market without proper research on hand. 

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