Investments come with returns and risk. In the case of equities, often, the higher the risk, the more the return. However, the risk appetite of each individual is not the same. You as an investor firstly need to understand your risk profile before making any investment decisions.
What is a risk profile?
A risk profile helps to determine your willingness and ability to take risks which, in turn, plays a huge role in determining an efficient investment asset allocation for your portfolio.
How much can I invest is an instrument to estimate the correct level of investment risk for an investor. The basic information required is family details, employment details, income, and expenditure to evaluate risk.Based on these, you as an investor can be categorised into high, moderate, and low-risk profiles.
How to determine your risk profile?
While determining your risk profile, you need to consider various factors like age, income, existing liabilities, etc. You also need to ask yourself explicit questions regarding your risk-bearing capacity like:
- How much can I invest?
- What are my goals?
- Am I mentally prepared if my investment shows a downward flow?
- For how long do I want to invest?
For instance, a person aged 29 years earning Rs. 80,000 every month will have more risk-bearing capacity than a person aged 65 who is already retired and has no other source of income.
Importance of risk profile in investment
Such risk assessment helps you in choosing the right investment asset allocation for your portfolio. As the risk appetite of every person is different and is based on various factors, the portfolio is made up of various asset classes.
If your risk profile is high and are willing to accept a significant amount of risk to maximise your returns on your mutual fund investments, you can choose to invest more in equity instruments and less in debt ones.
If you have a moderate risk profile, you can go for equity and debt instruments equally.
If you are someone with a low-risk profile who needs the safety of their capital, you can opt for more debt and less equity.
Assess your risk profile and begin investing
Risk profile determination is the first step that you as an investor need to take while starting your investment journey. And while you are at it, it is prudent to reach out to an expert to explore your investment options. A good financial advisor will always curate plans that are not only aligned with your financial standing, objectives and investment horizon but also your appetite for risk.
Reach out to one today, assess your risk profile and start investing.
