Everyone has to take some amount of risk while investing. But this risk differs from person to person depending on several factors.
For example: A billionaire can afford to take huge risks while investing because he/she has the money to spend and even if they lose it it wouldn’t matter that much, but on the other hand a middle class individual has to be careful with the money. Similarly a retired person can’t invest all his retirement savings into risky investment options but a younger person can afford to take these risks.
A risk profile helps one check their willingness to take risks while investing. It depends on the following factors:-
- Purpose: Every investor has a unique purpose for investing. The purpose could be to create income, to meet financial goals such as a child’s marriage or education, protect savings from inflation etc.
- Duration: Risk profile also depends on how long investor wants to invest for– short term, long term or medium term depending on this your investment strategy will be framed.
- Age: Risk is also normally associated with age. A younger person can afford to invest in the equity markets but that might not be the case with an elderly person, especially one who is nearing retirement.
- Income: One should check their income before investing to know how much can they contribute and their ability to invest.
Three investor moods or Types of Investors based on Risk Profile:
- The Aggressive Investor:
Aggressive Investor is the one who is ready to take high risks. Such investors are willing to expose themselves not only to volatile equity markets but also invest to small and unknown companies. These investors also take risks to invest in new and complicated financial products like Bitcoins, Futures, etc.
- The Balanced Investor:
Balanced Investors are those who can take medium risk –neither too low nor too high. They invest in a balanced portfolio including a mix of shares and bonds from stable companies. A small proportion of the portfolio may even be invested in riskier assets in order to deliver better returns.
- The Shy/Conservative Investor:
Conservation investors are those who take low risk while investing. Such investors prefer high quality debt and money market instruments, where they do not mind lower and steady returns and see a moderate growth in their capital.
How to check your risk profile?
1. Financial Advisor:
Consult a financial advisor to prepare a financial plan for you. Financial advisors will set up a questionnaire session with you to determine your profile. An advisor will use this information to create a proper investment portfolio for you as well as give you insights regarding your risk management tendencies, budgeting inclinations, etc. A good advisor will determine a client’s emotional tolerance for risk, their financial capacity for risk, and a client’s perception of risk.
2. Self- Evaluation:
If you want to self-evaluate your risk profile. Ask yourself questions like:
1. why I want to Invest?
2. What kind of returns do I expect?
3. What portion of my money would I like to set aside for investments?
4. What do I intend to use the gains for? How many years I can?
5. What is my investment objective?
6. What kind of risk am I willing to take in the long run?
You can also calculate your risk profile online by using risk profile calculator where they ask you certain questions to determine your profile and give you results.
Now that you know how to check your risk profile, remember to regularly update it. Do research, consult, be clear with your objective and make your move towards investments. Be risky but not frisky!