Moneycontrol Pro Panorama | Managing risk is crucial in investing

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Dear Reader, 

The Panorama newsletter is sent to Moneycontrol Pro subscribers on market days. It offers easy access to stories published on Moneycontrol Pro and gives a little extra by setting out a context or an event or trend that investors should keep track of. 

We don’t realise it but there are risks all around us and we sub-consciously take steps to manage it. It starts from education, when choice of school/college, course options and careers are determined by how ‘safe’ they are.

In the world of investing, risk is openly discussed even if not understood very well, especially among retail investors. For instance, some perceive stock markets as being unsafe but think high-yielding fixed deposits are 100 percent safe. In the stock market, risk is displayed as a badge of valour too. When Harshad Mehta’s character in Scam 1992 mouths the ‘risk hai toh ishq hai’ dialogue, he is recommending taking on more risk in the hope of earning more returns. That makes one want to break the bank and go all in on equities. But how the movie ends, is a sobering tale.

If 2022 was a lot about the opportunities, with risks present in the background then 2023 appears to be all about managing risks. Risk-taking capital is drying up as rising interest rates mean that the threshold for risk-returns to match is going up. On the one hand, there are spreadsheets where analysts can plot the expected returns. But on the other hand, the brain also does its own thing based on the information it silently processes. For instance, news of funding winter hits investing sentiment hard.

The global M&A frenzy has come to a halt, reports the Financial Times (free to read for Pro subscribers), with $1.4 trillion worth of deals announced in the second half of 2022 compared to $2.2 trillion in the first half. Overall volumes also recorded the largest decline since 2001. It’s just risk appetite being reset in line with lower return expectations and the fact that 2021 was a blowout year.

Capital is not going to come easy in 2023. That is already visible in some ways in the riskiest part of the universe --start-up funding. But that’s not going to kill the entrepreneurial bug. And, the risk-reward ratio of finding a dream job versus starting up is in favour of starting up, writes Sundeep Khanna in today’s edition. “With the economic slowdown in the West and its impact on sectors like IT and digital services in India leading to layoffs and a freeze on hiring, the job market isn’t booming, except for a chosen few,” he writes. This advice may apply more to the IT sector, but even in other goods and services, new ones pop up every other week.

Businesses will also manage risk more closely this year. How they invest in the course of the next 12 months will in some way determine if the much-awaited private capex boom comes to take some load off the government, which has been doing the heavy lifting so far. The odds are piled against them due to rising interest rates and inflation crimping consumption. But India’s economy could escape the worst of the global slowdown that’s forecast for 2023, so we may well pull a rabbit out of the hat.

The past few years may have led to many new investors thinking one just had to put money in equities, sit back and enjoy the rewards. But 2022 brought some harsh lessons for them with volatility and 2023 is likely to see some uncertainties play out as well. It’s again all about managing risk.

For example, today’s personal finance column talks about the laggards in the mutual fund portfolio. Investors believe in a fund manager’s wisdom to manage money but returns can be sub-optimal. Waiting for a long time in the hope of recovery may only increase risk and lower overall portfolio returns. Read here to know how to deal with laggards in your mutual fund portfolio.

Domestic investors have still fared well compared to their global counterparts. But that’s not how individual investors think when they look at their portfolio returns. If the Nifty returned 3.4 percent in 2022 so far, with all that risk they took, were they better off putting money in long-term debt? And, if 1-year FDs can return 7 percent in 2023, they may wonder if equities will give much more, say 12-15 percent.

A more conscious way of shaping one’s portfolio and understanding the underlying risks can help in one’s investing journey. For something less philosophical and more useful, read Ananya Roy’s article on how investors should read the market situation. And, for more actionable pointers on investing, read our research team’s investment insights given below.

Happy New Year from the Moneycontrol Pro team!

Investing insights from our research team

Weekly tactical pick: FIEM Industries

Why this asset financing NBFC offers good risk-reward?

What else are we reading?

A global recession is coming but India's defences are in place

Response to start-up sackings shows shallowness of reforms

Revisit maritime policy to increase India’s shipping revenues, EXIM trade

India-Brazil Ties | In Lula, New Delhi has a reliable friend

Three priority areas for Union Budget 2023

How RBI’s design choices will affect the demand for e₹

In 2023, headwinds created by global uncertainties to work against India’s export sector

Technical Picks: Aditya Birla Capital, Bank of Baroda, DMart, Ambuja Cements, and Aluminium (These are published every trading day before markets open and can be read on the app).

Ravi AnanthanarayananMoneycontrol Pro​