The process of identifying, analyzing and either mitigating or accepting the unforeseen incidents in investment decision-making is known as risk management. Basically, risk management is carried out by fund managers or investors. They analyze and make an attempt to quantify the risk factor or losses in a potential investment and then take adequate measures or actions according to their risk tolerance and investment objectives. Inadequate management of risk can bring in huge losses for individuals as well as companies.
The risk management can be grouped as a two-step process, the first step being the determination of risk that exist in a potential investment and the second – handling that risk wisely in a way that is best suited to the objectives of the investment. In the financial world, risk management occurs everywhere at any time. It occurs when investors hedge their currency exposure with the derivatives of currency, when an investor purchases low-risk government bonds instead of high-risk corporate debt and when a financial institution conducts a credit check on individuals before they offer a personal line of credit.
Benefits of Risk Management
In order to achieve its objectives, the organization has to take risks. It is the same in the case of individuals who are looking to earn a good return in the financial market. They need to take some risk to enjoy good returns on their investments. Hence, the organizations or individuals who take risk on investments should not only manage the crises that come up but should also actively manage the potential opportunities that offer them with a competitive advantage. Risk taking and risk management are the very essence of an organization’s growth and survival. Every decision one makes should take into account the risk factor involved in the process. It is best to use formal risk analyzing techniques to ascertain the risk and this helps greatly in taking wise decisions.
Effective risk management – or as the Danish professionals say risikostyring – helps in improving the performance of an organization against the set objectives by contributing to:
- Fewer unwelcome surprises and sudden shocks
- Resources will be used more efficiently
- Less wastage
- Less fraud
- Improving the service delivery
- Lowering the time management spent in fire-fighting
- Better management of maintenance and contingent activities
- Cost of capital will be reduced
- Better and improved innovation
- Any change initiatives will be implemented effectively
- Focusing more on doing the right things internally
- Focusing more on shaping effective strategies externally
The above-mentioned benefits of risk management are applicable to organizations in both public and private sectors. The private sector companies resort to management of risk to mainly focus on the investment made by shareholders and for preserving the share value. On the other side, the organizations in public sector conduct the process to perform cost management effectively in line with the government policies and legislation.
Essentially, the risk management is not about the elimination of risk. It is about identifying what negative incidents might occur in future and integrating the knowledge while decision making is done. The investor should accept the reasonable risks and make a contingency plan for the threats that they might encounter in future.
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