Risk management
The general practice of protecting yourself financially against loss — insurance is one tool for it, and spreading your investments is another.
In plain language
You cannot remove risk from life. What you can do is manage it, and the workbook uses insurance as its main example of how.
Its own words: insurance is a form of risk management, primarily used to manage the risk of an uncertain future loss. By paying a small, known premium, you transfer a large, uncertain potential loss onto an insurer.
Risk management is not only about insurance, though. The workbook also treats diversifying your investments — spreading money across different assets rather than concentrating it in one — as a way of managing the risks that come with investing itself.
How it works
The workbook uses risk management in two connected but different senses. In Chapter 6, it is what insurance does: converting an uncertain, potentially large future loss into a small, certain, periodic premium. In Chapter 5's discussion of the seven types of investment risk — market, unsystematic, inflation, liquidity, business, volatility and currency risk — the workbook's own suggested tools are different: asset allocation to benefit from diversification across sectors and companies, and Systematic Investment Plans or buying in smaller lots over time to manage volatility risk in particular.
The workbook gives no single figure — no percentage, no ratio — that defines "how much" risk management is enough; the concept in this booklet is qualitative, built around specific tools (insurance, diversification, SIPs) rather than a formula.
A worked example
Deepak insures his life for Rs 40,00,000 with a term policy, paying an annual premium of Rs 8,000. That is risk management through insurance — a small, certain premium standing in for a large, uncertain loss to his family.
Separately, Deepak invests his savings across a bank fixed deposit, a debt mutual fund and an equity mutual fund, rather than putting the entire amount into one scheme. That is risk management through diversification — a bad year for equities does not wipe out his entire portfolio, because his fixed deposit and debt fund are not exposed to the same risk.
Both are risk management, in the workbook's sense, even though one involves an insurer and the other involves no insurance at all.
Why NISM asks about it
Chapter 6 (Insurance Related Products) opens by defining insurance as a form of risk management. Chapter 5 (Investment in Securities Market) separately teaches diversification and SIPs as tools for mitigating the seven types of investment risk. Expect a question that tests whether you can identify risk management outside the insurance context, since both chapters use the same underlying idea.
Common exam traps
- Risk management is broader than insurance. Diversification, asset allocation and SIPs are also risk management tools in this workbook, even without an insurer involved.
- This is a general concept, not a specific SEBI framework — do not confuse it with a named regulatory scheme; the workbook uses the phrase in its plain, everyday sense.
- The workbook gives no numeric target for risk management — any percentage in a question is the question's own illustration.
Check yourself
1.How does the booklet describe insurance?
- a)A means of earning higher returns than a bank deposit
- b)A form of risk management protecting against significant potential losses and financial hardship at a reasonably affordable cost, used to manage the risk of an uncertain future loss
- c)A guaranteed savings scheme regulated by SEBI
- d)A contract under which the insurer pays whatever loss occurs
Show the answer
Answer: (b) A form of risk management protecting against significant potential losses and financial hardship at a reasonably affordable cost, used to manage the risk of an uncertain future loss
"Insurance allows individuals, businesses and other entities to protect themselves against SIGNIFICANT POTENTIAL LOSSES AND FINANCIAL HARDSHIP AT A REASONABLY AFFORDABLE COST. Insurance is a FORM OF RISK MANAGEMENT, primarily used to manage the risk of an UNCERTAIN FUTURE LOSS." Two qualifiers carry the meaning. "Significant" tells you what to insure — the losses you cannot absorb, not the ones that merely irritate. "Reasonably affordable" explains the mechanism: many pay a little so the few who suffer the event are made whole. Option (d) is the most tempting error, because a policy is "a promise of compensation for SPECIFIC POTENTIAL FUTURE LOSSES" and the contract sets out "the CONDITIONS AND CIRCUMSTANCES under which the insured will be financially compensated" — a policy pays in stated circumstances, not whatever happens. Note also that risk management is one of Chapter 3's three strategies for meeting financial goals.
2.Which of the following is NOT one of the four categories of financial goals listed in the chapter?
- a)Basic financial goals such as food, clothing and shelter
- b)Secondary or advanced financial goals such as education, house and marriage
- c)Speculation in the derivatives market
- d)Estate planning
Show the answer
Answer: (c) Speculation in the derivatives market
The chapter lists exactly four: "a. Basic financial goals (food, clothing, shelter, etc.); b. Secondary or advanced financial goals (education, house, marriage, etc.); c. Retirement planning; d. Estate planning." Two points are worth holding on to. Estate planning is on the list — it is not an optional extra for the wealthy, and Chapter 7 covers it alongside pension and retirement. And the chapter pairs the list with the means: "Individuals can use a variety of INVESTMENT, RISK MANAGEMENT AND TAX PLANNING STRATEGIES to meet their financial goals" — three strategies, of which risk management means insurance. Financial planning is not investing alone.
3.Section 80D allows a deduction for medical insurance availed for whom?
- a)Self only
- b)Self, spouse, dependent parents and dependent children
- c)Any relative, whether dependent or not
- d)Employees of the taxpayer
Show the answer
Answer: (b) Self, spouse, dependent parents and dependent children
"Individuals are eligible to claim deductions for MEDICAL INSURANCE availed for SELF, SPOUSE, DEPENDENT PARENTS AND DEPENDENT CHILDREN." Four categories, and the word dependent attaches to parents and children — it is not a general permission to insure any relative, which disposes of option (c). The inclusion of dependent parents matters more than the deduction itself in Indian households: Chapter 6 showed that an elderly parent is simultaneously the hardest person to insure commercially and the most likely to need cover. Note the scope of the section: it is for medical insurance, the premium, rather than for medical expenditure at large. Chapter 6 explains why a tax benefit attaches at all — insurance is "risk management" against "significant potential losses and financial hardship", and the system nudges households to buy protection rather than absorb a hospital bill from savings.
Where this is taught
Free preparation for NISM Series SEBI-ICERelated terms
- Systematic Investment PlanA facility to invest a constant amount into a scheme at regular intervals, which buys more units when the NAV is low and fewer when it is high and so averages the cost of acquisition down.
- DiversificationSpreading an exposure across holdings that do not move together, so that total risk falls by more than total return does — minimising risk per unit of return.
- LiquidityThe degree of ease with which you can turn an investment back into cash at a fair value — one of the three pillars of investing, alongside safety and return.
- Insurance policyThe written contract an insurer gives a policy holder. It states the premium, the sum assured, and the conditions under which the insurer will pay a claim.
- Risk frameworkThe risk structure a portfolio manager sets at the strategic level, in line with the investment objective — it names the risks, ranks them, decides how each will be treated, and is monitored and modified continuously.
- Risk treatmentThe action a portfolio manager takes when a risk event occurs — tolerate it, mitigate it, transfer it, or terminate the activity — chosen on the nature, severity and frequency of the event.