Methodology
Portfolio risk methodology
Objective, inputs, calculation, interpretation, assumptions, limitations and data sources.
Answer
Vestmind measures portfolio risk as a set of named, individually computed exposures — concentration at four levels, drawdown sensitivity, allocation mismatch against horizon, and credit and liquidity exposure in the debt portion — rather than as a single risk score.
Objective
To name the specific risks a portfolio carries, each with the holdings and the number behind it, rather than to compress them into one figure that cannot be acted on.
Inputs
- The look-through portfolio produced by the portfolio analysis method.
- Historical price series for listed holdings and NAV series for schemes.
- Credit ratings and maturity profiles disclosed for debt holdings.
- The investor's goals, horizon and stated capacity for loss, where provided.
Calculation
- Concentration. Top-N weight, largest single weight and HHI at company, sector, factor and fund-house level, on look-through weights.
- Drawdown sensitivity. The portfolio's value under historical stress sequences applied to its current allocation, reported as a percentage fall rather than as a probability.
- Horizon mismatch. The share of the portfolio in volatile assets against the share of goal liabilities falling due within the period over which those assets can reasonably be expected to recover.
- Debt quality. Weighted credit rating and maturity of the debt sleeve, and the share of it in instruments below a stated rating.
- Liquidity. The share of the portfolio realisable within a week at ordinary volumes.
Interpretation
Each measure is reported separately and in its own units. A single composite score is deliberately not produced: it would require weighting risks against one another, which depends on the investor's circumstances rather than on the portfolio.
Drawdown figures are what a historical sequence would have done to this allocation. They are not forecasts and are not probabilities.
A risk that is deliberate is still reported. The report says what the exposure is; whether it is acceptable is the investor's judgement.
Assumptions
- Historical stress sequences are a reasonable guide to the magnitude, not the likelihood, of future falls.
- Disclosed credit ratings are current as at their disclosure date.
- Ordinary trading volumes persist for the liquidity estimate.
Limitations
- Historical scenarios cannot contain a stress that has not happened. A drawdown figure is a lower bound on imagination, not an upper bound on loss.
- Correlations estimated from history change, and they change most in exactly the conditions the estimate is being used for.
- Credit ratings lag credit events.
- Risk in an investor's circumstances — job security, a liability not entered, income concentrated in the same sector as the portfolio — is invisible to the portfolio and is not measured.
Sources
- Securities and Exchange Board of India (SEBI)
- SEBI — Categorization and Rationalization of Mutual Fund Schemes — defines the scheme categories and what each may hold
- National Stock Exchange of India — listed company disclosures and index constituents
How Vestmind does this
VestFolio is Vestmind's AI portfolio analysis product. It reads an Indian investor's holdings — stocks, mutual funds and ETFs — and reports what the portfolio is actually exposed to: concentration, mutual fund overlap, sector and factor tilts, asset allocation drift and the risks those create.