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With risk management framework being extremely important for asset management companies, how does ITI MF mitigate various risks?
A better understanding and clear identification of risk categories simplify risk management and help navigate the market volatility. Broadly speaking, there are two kinds of risks mutual fund carry- AMC-level and scheme-level.
While AMC-level risks comprise operational risks, technology, information security and cyber risk, outsourcing risk, talent risk, financial reporting risk, and reputation and conduct risk, the scheme-level risks include investment, liquidity, credit and governance risk.
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Risk |
Definition |
Mitigation |
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Scheme-Level Risks |
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Investment |
Investment risk can be defined as the probability or likelihood of occurrence of losses relative to the expected return on any particular investment. Funds are vulnerable to underperformance owing to market risk, liquidity and credit concerns.
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Creating a thorough investment policy, enforcing a stewardship code of conduct, monitoring fund positions and concentration every day, keeping an eye on system-based regulatory and internal investment limits, holding monthly investment committee meetings to discuss in-depth analyses of fund performance and position, market risk, etc. |
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Liquidity |
This risk arises when a sizeable number of investors choose to redeem their investments at the same time |
Maintaining minimum regulatory liquid assets in fixed income, monitoring secondary market liquidity of the equity schemes and being conscious of portfolio and investor concentration, etc. |
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Governance |
Governance risk is a risk that the persons who are in position of power or fiduciary responsibility towards the holders of security (equity/debt), do not act in the best interest of such stakeholders, rather compromise the interest of such stake holders for their personal gain |
Creating a thorough investment policy and stewardship code of conduct that includes asking the investee company for information for monitoring purposes while keeping an eye on the insider trading regulations and continuously monitoring the investee companies on a variety of topics, including related party transactions, operational and financial performance, corporate governance, opportunities, and risks |
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Credit |
The issuer credit risk associated with individual securities, the pessimistic prognosis for particular sectors or industries, and the ensuing impact on credit exposures are the credit risks pertinent to mutual funds. |
Independent review of external credit rating, putting restrictions on unrated debt investments, etc. approved and documented Investment policy covering credit risk management and individual investment limit based on the credit rating of the instruments. |
- Over 256* stocks are identified as active stocks, suitable for investments
- Around 228* stocks are classified as soft stocks, which may offer investment opportunities or were part of the portfolio earlier
- Together, active and soft stocks form the investment universe
- Each stock is included in the investment portfolio following the internal discussion within fund management team and thorough research report by respective research analyst.
- Active stocks are closely monitored and quarterly notes are prepared
- Regular internal meetings are used to monitor and discuss different facets of the active stocks
- Soft companies are tracked for the latest developments, fair valuations, and investment cases for the medium to long term
- The process starts with awareness about companies
- Focus is on picking bottom up stocks
- Emphasis on stock picking within outlined sectors
- Regular monitoring of sectoral weights to maintain a reasonable range of sectoral divergence
- The investment philosophy largely emphasizes remaining fully invested instead of aggressive cash calls
