Risk management in the asset management industry (risk measurement techniques): An evaluation of ‘value at risk’ tools

This Report is divided into two parts. Part I is introductory in nature containing brief profiles of global and Indian mutual fund industries, risk and the mutual fund industry, theoretical aspects of risk management process and various concepts associated with measurement of risks in mutual funds. Part II specifically focuses on 'value at risk' (VaR) concept and examines the VaR tool in a comprehensive manner from various dimensions. Observations and conclusions are given at the end of the Report. With the increasing introduction of new financial products, expanding global marketplaces and increasing use of information technology, the nature of the securities business is constantly changing and becoming more complex.As a result,a dynamic risk management function must play an essential role in assuring investor protection and the integrity of a firm's financial condition. risk management is the modern discipline that answered the call to handle various business risks. A mutual fund is a type of Investment Company that gathers assets from investors and collectively invests those assets in stocks, bonds, or money market instruments. Individuals and institutions invest in a mutual fund by purchasing units (shares) issued by the fund. It is through these sales of units that a mutual fund raises the cash used to invest in its portfolio of stocks, bonds, and other securities. Through the collective investments of the mutual fund, each investor shares in the returns from the fund's portfolio while benefiting from professional investment management, diversification, liquidity, and other benefits and services. The mutual fund industry experienced tremendous growth both in number of funds and amount of assets under management all over the world. In the past 20 years, mutual fund assets have grown from under $400 billion to more than $ 14.0 trillion and become a vital component of the financial security of millions of investors worldwide. The asset management industry is large, complex and fragmented. With assets in the range of tens of trillions of dollars, the industry is noted for the wide scope and depth of its investments, ranging from equities, bonds, money market and currencies, to their equivalent derivatives thereof. This had led to a perception that the industry has immense potential to affect/disrupt almost any economy in the world with its activities alone. The first funds, in the 1980s, were closed-end funds. With increasing liquidity in emerging markets, open-end funds have become the most widely used instrument. It is not surprising that it attracts a lot of attention of the regulatory agencies that would like to ensure that fund managers select investment strategies that are optimal from the investors' point of view. Keeping in view the large amount of assets managed by mutual funds, the health of asset management industry is very vital for maintaining the vibrancy of financial markets from the point of view of investors, fund managements and the regulators.