This paper is about the basics of risk management and an introduction to different careers that are available for risk management. It talks about the landscape of risk management in India.
CA CFA Raghuvir Mukherjee, looked at risk management as he is a head of risk management in IIFL Wealth & Asset management and has studied about this subject deeply. He has given the students an insight about the industry and has guided them to understand the various different aspects about risk management.
What is risk management
In his webinar, he starts off by explaining the basic meaning behind risk management. He says that risk management is a possibility of divergence between plans and actual outcomes. He mentions about the ever changing world and mentions that change is bound to happen. There has been severe change is the past few years and the risk that comes with change can be unpredictable.
He talks about how risk management has proved to be helpful in terms of curbing the factor of unpredictability and helps in managing risk. It helps in managing volatility of changes that affect a daily course of business. Risk management helps in keeping the plan of action intact and keeps anticipated risk at bay. He discusses how risk management is like monitoring the vital signs of a company by giving an example of how vital signs of a patient have to be monitored when they are in a hospital. The vital signs of a company could be factors of measurement such as value at risk, Sharpe ratio, information ratio, volatility, etc.
Types of risks
Mukherjee then explained the different risks that are faced by a risk manager. They are broadly classified as internal and external risks.
External risks are not peculiar to the business and cannot cause harm on a severe level. External risks involve risks such as technological changes, government policies, consumer tastes and preferences, economic crisis, social media, etc. He explains how a certain risk can affect two different industries at the same time. He gives an example of how a decrease in people borrowing a loan for a house can affect the banks as well as real estate industry. Risk management helps in overcoming such impulsive changes that turn out to be risks.
Internal risks are risks that affect the organization on a severe level and need close monitoring to reduce the level the risk. They involve risks of market, operational risk and credit risk. For risk management and fund management, market risk monitoring is very critical. It entails independently in monitoring fund performance. Performance of the organization is broken up into different components using the Brinson model.
Mukherjee explained how risks could be caused due to inflow or outflow of cash in the country. He explained this point using a case study of American investors investing in India and Indian businesses. He explained how an unpredictable risk is bound to take place as the inflow of cash in the form of FDIs and FIIs will reduce due to inflation; which can cause overall change causing a risk to every individual as well as an organization.
He also goes over risk management being a very analytical job and needs constant attention to detail and finding out different observations and conclusions to the data. He talks about involvement of big data and the need to constantly keep filtering data out to understand good and bad observations.
Qualifications for becoming risk manager
He concluded the webinar by mentioning different ways to become a risk manager. A CFA/GARP FRM/PRMIA qualification over a basic qualification of Actuary/CA/MBA could help kick start the career. He mentions that good knowledge of statistics helps. Integration of data science and working with macros on MS Excel and pivots can help create models. Programming language or a software like ‘R’ would also help.
This summary was prepared by Taniya Sonalkar based on the webinar by Raghuvir Mukherji at the CFA Institute.