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Get Tested Before You Invest!
August 2, 2011

In this piece, we explain the concept of risk profiling and why every investor should use the Risk Profiler Tool to understand their risk appetite. We highlight the general mistakes made by investors and ways in which they can be avoided.

Author : Niketa Agarwal

 Get Tested Before You Invest!

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:

High Risk Appetite

Low Risk Appetite

  • Has steady source of income
  • The investment is the source of income
  • Has a long-term investment horizon
  • Has a short-term horizon

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 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.

Disclaimer: iFAST and/or its content and research team’s licensed representatives may own or have positions in the mutual funds of any of the Asset Management Company mentioned or referred to in the article, and may from time to time add or dispose of, or be materially interested in any such. This article is not to be construed as an offer or solicitation for the subscription, purchase or sale of any mutual fund. No investment decision should be taken without first viewing a mutual fund's scheme information document including statement of additional information. Any advice herein is made on a general basis and does not take into account the specific investment objectives of the specific person or group of persons. Investors should seek for professional investment, tax, and legal advice before making an investment or any other decision. Past performance and any forecast is not necessarily indicative of the future or likely performance of the mutual fund. The value of mutual funds and the income from them may fall as well as rise. Opinions expressed herein are subject to change without notice. Please read our disclaimer on the website.Please read our disclaimer in the website. Risk Factors: Mutual funds, like securities investments, are subject to market risks and there is no guarantee against loss in the Scheme or that the Scheme’s objectives will be achieved. As with any investment in securities, the NAV of the Units issued under the Scheme can go up or down depending on various factors and forces affecting capital markets. Past performance of the Sponsor/the AMC/the Mutual Fund does not indicate the future performance of the Scheme. The name of the Scheme does not in any manner indicate the quality of the Scheme, its future prospects or returns. Please read the Statement of Additional Information and Scheme Information Document carefully before investing.

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