Study of Systemic Risk Involved in Mutual Funds

Abstract

Systemic risk, may be defined as the risk that contaminates to the whole system, consisting of many interacting agents that fail one after another. These agents, in an economic context, could be firms, banks, funds, or other financial institutions. Systemic risk is a macroscopic property of a system which emerges due to the nonlinear interaction of agents on a microscopic level. A stock market itself is a system in which there are many sub-systems, like Dowjones, Nifty, Sensex, Nasdaq, Nikkei and other market indices in global perspective. In Indian market, subsystems may be like Sensex, Nifty, BSE200, Bankex, smallcap index, midcap index, S&P CNX 500 and many others. Similarly there are many mutual funds, which have their own portfolio of different stocks, bonds etc. We have attempted to study the systemic risk involved in a fund as a macroscopic object with regard to its microscopic components as different stocks in its portfolio. It is observed that fund managers do manage to reduce the systemic risk just like we take precautions to control the spread of an epidemic.