Before you invest, know your risk profile. The risk profile will depend on various aspects and there are three broad categories of risk takers.
We all know few people who have invested in a stock that had skyrocketed within a short period. While we all may be tempted to go ahead and buy the stock or wish we were in their place, we need to pause and think before playing with our hard-earned money.
There may be many elements that your friend is not telling you. This can include the price at which we brought the stock, how much loss he has faced earlier etc. It is important to research before jumping into any investment option.
While your friend may have taken the risk and got attractive returns, you need to ask whether you will be able to take risks.
So before investing in any investment option, you should be aware of your risk profile. The evaluation of an individual’s willingness and ability to take risk is known as the risk profile. This evaluation is done to understand the proper investment asset allocation for a portfolio.
People invest to fulfill their financial goals. Different individuals will have different investment objectives. Some may want to generate income, some may want to create wealth to meet financial goals, etc. Hence, the risk tolerance between two individuals with different goals will be different. A retired person who wants to generate income will be able to take less risk than a person in his 30s who is investing money for his retirement.
Different people have different goals that they plan to achieve at a particular age or year. Some may want to park money for a few months, while others may want to be invested for a couple of years. Hence, the time horizon also impacts the risk that you can take with your investments. The longer the time horizon, the more risk you can take.
Age determines your capacity how much you can invest. Older individuals have low or very low-risk taking capacity than young investors. There is a basic rule of thumb, 100 less your age, that tells you the risk that you can take in your portfolio. If you are 40, then 60% of your portfolio can be in high-risk instruments such as equities.
Income is a major factor that affects the risk profile. An individual with low income can keep a major part of your income in assets that give assured returns such as fixed deposits and recurring deposits. Once the income grows, the risk-taking capacity will also increase.
While the risk profile determines various factors, investors can be broadly classified into three categories based on their risk profile.
Aggressive Investors are those investors who do not hesitate for an investment involving high risk. They are completely aware of where they are investing and what will be the results. They want higher returns and they know that with higher returns come high risks.
Moderate Investors are also known as Balanced investors. Such investors are completely neutral. These investors take the medium risk- not too low or too high. Their portfolio will have a mix of equity and debt investments. If they invest in equity mutual funds, they may not be willing to invest in small-cap funds or stocks.
Conservative investors are investors with a low-risk profile. Capital protection is the main agenda for such individuals. They don’t want risk on any principal amount. Hence, investment options with assured returns can be a good investment option for conservative investors.
Now that you know about the various aspects of risk profile, you may be curious to know your risk profile. A financial advisor can help you to assess your risk-taking capacity. Also, there are several online tests and risk assessment calculators that can help you find your risk profile.
You can take this Moneycontrol and Kotak Mutual Fund’s online assessment calculator to check your risk profile.
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