Riya, aged 45, has made it a rule to invest 40% of her monthly income in equities, as a friend told her that these days equity market is doing extremely well and she might earn phenomenal returns on her investments. She is planning to retire after 5 years, when she completes 50 years of age and enjoy life.
Things were going smooth when suddenly after 2-3 years marketstook a plunge and Riya incurred huge losses. Now she was clueless about what to do. The only option left was to extend her working life.
Whenever you plan to invest any amount, there is something which you should not ignore at any cost: Your RISK PROFILE.What could have gone wrong with her? She was a disciplined investor, yet was put in soup just before she had planned to retire.
Always remember, blind investing will lead you nowhere.
The phrase ‘Risk Profile’ very widely is understood as a person’s willingness to take risk. However, there’s more to it. Risk profile is determined after assessing a person’s:
- Willingness to take risk i.e. risk toleranc
- Capacity to take risk
In the above example, Riya had willingness to bear risk associated with equities, however capacity was missing. She was about to retire and ideally, very limited exposure should have been there towards equity / equity instruments as it is typically a long term investment.
While risk tolerance is a psychological characteristic, risk capacity is a financial one. Now, the question arises, that how can a person’s risk profile be assessed properly. Here, comes in the role of a financial planner. A financial planner can determine the client’s risk profile with use of designed questionnaires and his / her experience.
An investor can be – (choose who are you?)
Aggressive investors usually are those who are comfortable with high risk levels and afford to take high risk as well. Let us say somebody who is in his / her early 30s, just married, doing great in professional life and at the same time psychologically comfortable with ups and downs of market returns as well.
An investor, who has risk tolerance ranging from low to moderate, is a conservative investor. These investors usually do not have much time left before retirement as well.
Their preferred investment avenues are bonds, FDs, post office schemes etc.
Balanced investor seek medium to high return from their investment. They are willing to accept some volatility in returns in achieving growth in invested money. We will discuss the model portfolios for different investor types in upcoming articles.
Now that we have had a brief look at the investor types, it would be easy for you to get an idea about your risk profile. What type of investor are you? It is critical to decide on your risk profile before you choose your investment strategy.
So what are you waiting for…….figure out now, if needed take help of a professional. And from now on any amount you invest, invest accordingly.