The earlier article we have studied
about the risk and different types of risk and also we had discussed about the
risk management process. Today in this article we will be discussing about how
to manage the risk or how to reduce the risk in over investments or businesses.
Risk Mitigation Strategies
Risk
can be mainly classified into two types – systematic and unsystematic risk.
Both the risk are to be handled differently and using different strategies. In
this article we will be discussing about various risk mitigation strategies or
techniques that are used to manage the risk in the effective way. The various
risk management techniques are as follows,
§ Risk Avoidance
§ Risk Control
§ Risk Transfer
§ Loss Reduction
§ Diversification of Risk
§ Duplication of Resources
§ Self Retention
Now let us discuss each of the risk mitigation strategies.
§ Risk Avoidance
Risk Avoidance
is one of the most effective strategy for avoiding the risk as is completely
eliminates the risk of loss. Though it is most effective strategy in
elimination of loss it is not the best choice always because it eliminates the
risk by not making the investment. This strategy is used when there is high
risk associated with the investment and it may be serious threat to your
financial condition and the risk is above the risk bearing level of the
individual or firm. When the risk is foreseen is out of your control and the
risk is not acceptable by an individual or organization. And you don’t wish to
put your resources to manage it properly.
§ Risk Control
Risk Control is
the process of managing the risk by taking the proactive steps in order to
reduce or minimize the risk identified to minimize the losses then may take
place in future. It is one of the most widely used strategy along with the
other risk minimizing strategy with a objective to be on the safer side in a
investment. This strategy enables us to make investment by letting us to take
calculated risk and making the informed decisions based on the information.
§ Risk Transfer
Risk Transfer is
the process of transferring your unwanted risk to another party by law or a
written agreement between the parties or by insurance. This strategy can be
used in the following situations
·
Purchasing
the insurance for an uncertain risk.
·
To
protect an individual or organization for the liability imposed by civil law by
purchasing insurance policy.
·
When
your work is carried out by another party on your behalf.
§ Loss Reduction
Loss Reduction is one of
the loss reduction strategy where an individual or organization can reduce the
loss that has already taken place. It is post-loss strategy to reduce the loss
due to the risk that is associated with the investment. An individual or
organization plans to adopt loss reduction strategy will making the investment
to reduce the impact of loss.
§ Diversification of Risk
Diversification of Risk strategy
tells us that don’t put all you money in one investment rather have a
diversified portfolio in order to minimize the unsystematic risk. The basic
principle is that when in one investment loss the other investment will nullify
the effect by the gain in another investment but if you have a single
investment there will be no other investment to nullify the effect and you have
to bear the complete losses. By diversification of the risk you can avoid the
unsystematic risk that comes into picture with the investment and is widely
used for unsystematic risk.
§ Duplication of Resources
Duplication of
Resources refers to having backup for any contingency that will be arising due
unexpected situation and interrupts the normal operations. Here in this
strategy the individual or organization has backup of all the critical and
important things so that the important and high priority things are not
affected and yet can be managed.
§ Self Retention
Self Risk Retention is adopted
strategy when it is either non-insurable because of high risk or small and
infrequent losses that can be better managed internally. This strategy is not
used for high risk where there is a possibility high losses.
To conclude that different type of
risk associated if handled properly and right strategies are adopted we can
minimize the risk and losses according so that we manage our portfolio
effectively and have good rate of returns with the calculated risks.
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