Before making any investment it is extremely essential for an investor to be completely aware of his risk profile. Basically, the risk profile represents the level of risk an investor can undertake on his/her investments and appraises his/her capacity to accept a loss. It denotes an investor’s attitude towards a risky situation that may or may not affect the value of his/her investments.

Advantages of a Risk Profiler

• A risk profiler gives a head start to the financial plan as the investor knows the amount of risk he should be taking and choose appropriate products
• It also maps the risk level of the investor according to his personal investment needs and preferences
• Understanding his/her risk profile stops an investor from undertaking unwarranted risk which may result in faulty investment decisions
• Investors can personalise the investments, more suited to their objective.

Understanding Your Risk Profile

The risk profiling classifies an investor in two main categories:        Conservative:In this case, the investor invests in extremely low risk investments which offer low albeit, certain returns. Aggressive: In this case, the investor is ready to make higher risk investments.Here, the investments deliver higher returns as they are associated with greater risk.

Apart from these two main categories an investor can also be classified as Moderately Conservative and Moderately Aggressive in which the investments carry certain level of risk but, at the same time offer safety too. The risk tolerance level of an investor estimates the level of loss the investor may be ready to take on his investment. 

Avoid Common Traps

Most people think that an investor can have high or low risk appetite if:

The above cases highlight the scenarios wherein an investor can have high or low risk appetite.

Example: Suppose, Ankit can invest for a long period however, the case simply cannot estimate that Ankit has a high risk tolerance level. This is because, even if Ankit can take more risk, he may not have the capacity to endure a loss on his investment owing to lack of security in his current job. Thus, the reasons may vary from psychological factors to his monetary condition.

Often, people think risk is limited to a fund or an investment type. But, it is also important for investors to know how to determine the correct risk level of their portfolio. Otherwise, an investor may choose “wrong” funds i.e., end up investing in portfolio of funds that are not suitable for him.  

Example: Young and bubbly Rina decided that she can put her money into mutual funds while she is working. But, what Rina didn’t realize that she has invested only into MIPs from different fund houses. While the funds may be good, her portfolio comprises of funds that have only 15-20% equity. Thus, she may not reap the desired benefits when she finally takes a break from her work and requires a healthy corpus to maintain a similar lifestyle.

Things to note while making an investment:

Time Horizon: An investor should keep in mind the time horizon of his investment. A long term investment will help him take more risk in comparison to a short term investment. Thus, keeping the time horizon in mind an investor would be able to easily and properly assess his investment decision.

Surplus Cash: An investor should invest the surplus cash which he/she does not need in the near future or can withstand losses in case of market turmoil. When the investor has invested the surplus money after meeting all the obligations, he is not any under pressure to sell it in market downside. Therefore, an investor does not make hasty choices and is able to hold on to the investment decision.

Investment Goal: An investor should have a clear investment objective and should choose funds which are in line with his objective.

Take the Test Now on Fundsupermart.com Risk Profiler!

Our Risk Profiler helps retail investors to find their ability to take risk on the basis of age and investment horizon. And, investors can gauge their risk tolerance levels depending on their investment experience and objective.