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Limit investments in group companies or subsidiaries



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Risk is something that cannot be avoided altogether.. at least in Investing.

There are several types of risks involved when we are into investing.

Credit risk, market risk, liquidity risk and operational risk etc.

Each of this risk has to be dealt individually.

For this, there should be an appropriate risk management structure in place.

However, we can manage and reduce the impact of risk with some safeguards.

One such safeguard is our Rule #23

Please read the rule one.

Rule #23: Avoid investing in more than one stock belonging to the same group of companies and subsidiaries (or promoters)

The rule is self-evident and can be easily understood.

When we invest into two companies that belong to the same group or managed by the same promoter, we are exposing ourselves to additional risk.

Just imagine what happens to the group stocks if the promoter is arrested for some reason.

Or when CBI or such law enforcement agency raids one of the group companies.

So, in order to avoid over exposing ourselves to the risks involved, it is better to stay ourselves limited to one or few companies belonging to the same group of companies (or promoters).

In a similar method, limit investments to core companies and their listed subsidiaries.

Examples

  • Tata Group: According to the company's website, the Tata group comprises over 100 operating companies in seven business sectors: communications and information technology, and engineering among others.
  • Aditya Birla Group
  • Reliance Group
  • Murugappa Group
  • Escorts Group
  • Jaypee Group
  • Future Group
  • Hinduja Group

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