Stories about stable fee-based businesses sound comforting, yet every investment carries risk, and ignoring it can be expensive. Enthusiasts who follow the NSDL Share Price may focus on recent growth and forget that sentiment can reverse. Those who study the CDSL Share Price may admire its long record without questioning what might disturb it. A balanced investor weighs both opportunity and danger before committing funds.
Market Cycle Risk
The risk of reduced market activity rearing its head is one that is most immediate in context. Part of the earnings of a depository rests on volumes and new listings. Public offerings dry up during prolonged periods of bear-ness, volumes go down and retail participation falters. While recurring fees act as a safeguard, profits may still take a hit. Usually, share prices play catch up to underlying profits, but sometimes they may fall more sharply and earlier than fundamentals warrant. To avoid the risk of paying overly high prices for good stocks, valuation is important. Compare what you are paying with where the stock has traded, and where you think it ought to trade, given reasonable growth expectations. Also consider building a position gradually, instead of at one go.
Valuation Risk
Good stocks can always command a premium. When a stock is at a rich valuation, even good results may be deemed as insufficient. If the growth trajectory falters or margins shrink, the share price may fall sharply, even as the business continues to perform well. To mitigate this risk, analyse the current valuation vis-a-vis its historical averages, as well as your own expectations from the company’s growth. Build your position gradually so that you are not fixated on one price point.
Regulatory and Policy Risk
Depositories function under the radar of strict regulation. Permitted fees, volumetric norms, requirements in respect of ownership patterns in certain cases, or changes to market microstructure may impact profits. Decisions on such matters are often taken after consultation, which makes it possible for those tracking such developments to get cues ahead of time.
Technology and Operational Risk
Systems that maintain the records of crores of investors need to be foolproof. Outages or system freezes, computer viruses or operational errors may shake confidence and invite regulatory censure. A hiccup during a busy trading day may even invite a media flurry. Companies deal with this by operating with fail-safes, and back-up systems, but it is impossible to protect against all eventualities. It is wise to read up on what steps the company has taken to prevent a recurrence if something adverse has occurred.
Concentration and Dependence Risk
Dependence on a small set of counterparties, exchanges or issuers can be risky. A shift in behaviour, or valuation of one of them could have ramifications on the other. The presence of only a couple of big players in a sector too, could see regulatory scrutiny around unfair trade practices.
When it comes to one’s own portfolio, concentration needs to be avoided. If a large chunk of one’s savings is in one theme, one bad development could drag everything down.
Liquidity and Supply Risk
Some stocks, especially those that have recently entered the market, may witness an overhang of supply as promoters and early investors sell off stakes following the expiry of lock-in periods. Mega-block deals towards the end of such periods could see share prices get temporarily depressed, irrespective of fundamentals.
By reading announcements of intention to do so, by shareholders and promoters, it is possible to anticipate such supply surpluses. Such overhangs are usually short-lived and tests the patience of long-term investors. In any case, it would help to avoid selling into such slumps.
Personal Behavioural Risk
More often than not, it is the behaviour of the investor, that proves to be the single largest risk. Trading on hot tips, selling off in a panic, or being margin-caller poor, can wreck a portfolio. The only way to combat such vulnerability is to have a discipline going in. Always put on paper why you think you should buy a stock, and to what extent you are willing to lose money. Also set stop-loss levels and stick to them. It also helps to avoid watching the markets too closely.
A Sensible Way Forward
Risk, as seen, is part of the investment business. However, risk needs to be taken in measured doses, and with awareness. Diversifying bets helps considerably. Also building sizeable positions out of any single stock should be avoided. Discipline is important and so is doing homework beforehand. It is always important to keep an emergency line of defence, so that circumstances do not force one to sell a good stock at the wrong time in the markets.