What is a Risk profile? How to Invest basis that?

Many young investors tend to invest on peer pressure or because someone asked them without understanding why they want to invest and how they should invest.

There is only one answer to your ``Where to invest?”, “How much to Invest”. “When to sell” ? “How to get started?” i.e. risk profile.

What is a risk profile?

There is a risk associated with everything that you do in life. Whether it is a choice of the college that you want to study in  or the employer you decide to work for; everything that you do in life is associated with a certain amount of risks with anticipation of some return. Even your relationships have the risk - return associated with it.   Your investments are not any different, there is a risk - return relationship there as well. Every investment has an underlying risk and hence, you earn a return on the same. Hence, you must invest based on your risk profile - i.e. your risk taking capacity which basically means - How much risk are you okay to bear  in order to earn your desired returns. 

Technically speaking, Risk profile is an analysis of your risk appetite in different situations. Every individual has a different tolerance of risk based on their age, income, financial stability, etc 

Your risk taking capacity (risk profile) is a function of two things:

  1. Your ability to take risk ( Depends on your age, amount of wealth and urgency of goal)
  2. Your willingness to take risks (Depends on your wealth, life experience and your profession.)

Remember the fundamental rule of investing:

High Risk = High Returns

Low Risk = Low Returns

You can learn more about what investment risk is from our YouTube video here - https://www.youtube.com/watch?v=3pl5IIldDFE 

Use our risk calculator tool to view your investment risk level. Find out your risk profile, estimate financial risk-taking capacity and understand your (psychological) risk tolerance level . This will help you know your asset allocation i.e. your Debt: Equity mix which will help you derive how much you should invest in each asset class.

You must know the risk of your investments and then you must align your risk taking capacity with the underlying risk of the investments so you can sleep peacefully at night while your money is growing for you.

 

Here are the most common risk profiles for investors: 

 

SR NoRisk ProfileMeaningPercentage in Equity(Return = 15%)Percentage in Debt(Return = 8%)Expected Return
1AggressiveWilling to take significant risk to maximize return over long term90%10%14.3%
2GrowthSeeking maximum return over medium to long term with high risk70%30%12.9%
3BalancedSeeking for relatively higher  returns over medium to long term with moderate risk50%50%11.5%
4ConservativeWilling to take small level of risk for potential returns over medium to long term30%70%10.1%
5DefensiveSeeking safety of capital, minimal risk and/or low return10%90%8.7%

 

Why to invest based on a risk profile?

It is very convenient to invest based on a random recommendation or a tweet or a telegram post. But does that really work for you? Does it give you the desired results needed to achieve your goals? Does it answer your question of how much to buy and when to sell? Such recommended buys are only half baked - Let me share an example with you, one of our Instagram followers had messaged us about her investment journey. Tanya (name changed) was a college graduate and had an urge to invest her internship stipend. It was a good initiative of her to invest from an early age; however due to lack of knowledge she invested in small cap mutual funds as her friends suggested, initially it was doing very well. Now given that she was a college graduate and was investing her only pocket money savings - small cap funds were a very risky investment for her. But she did not know this and invested all her savings in that. . Sadly after a year the market crashed in March 2020 and she faced more than  50% loss in her portfolio, and she sold all of them in panic. This is not Tanya's story but everyone’s. We are sure that at some point in time, you would have also bought and sold purely based on recommendations and regretted those decisions later.

 

Further, we learn from this instance that if she would have diversified her portfolio based on her risk appetite, she wouldn’t have faced so much loss and would have in fact more money eventually because she would have continued to invest with the market loss. 

I have written a detailed blog on my personal investment journey where I invested based on my risk profile and how I made over 28% gains from my portfolio. https://financial.wealthcafe.in/blog/2020/03/how-am-i-investing-in-current-times/ 

As an  investor, your risk profile will help you plan your investments as per your risk bearing capacity so that in any worst-case scenario, you will never lose beyond your capacity. Hence, the benefits of the same are: 

  • It helps you in taking the right risk as per your willingness and ability.
  • Selecting the right asset class in check with your goal and risk profile, so that you have a perfect balance of rewards and risk in your portfolio.
  • It helps to keep your emotions away from your trading decisions.

Read our article to understand how to invest based on risk profile: https://financial.wealthcafe.in/blog/2021/10/monthly-sip-for-higher-education/ 

Wealth Café Advice

Risk profiling is very important for every investor. Any investment planned without a risk profile analysis can lead to severe financial problems. However, with changing priorities and responsibilities your risk profile will change. For instance, the kind of risk you were willing to take at 20 may not appeal to you at age of 45. Therefore, revisit your risk profile every year when you are reviewing your portfolio. This will help to benchmark your risk tolerance without much hassle. To understand this better you can even seek financial advice  from a registered investment advisor.  You can reach out to us by filling this google form or at iplan@wealthcafe.in We are SEBI registered investment advisors and can help you make sound investment decisions. You can read about our advisory services at ria.wealthcafe.in

Disclaimer: - The articles are for information purposes only. Information presented is general information that does not take into account your individual circumstances, financial situation, or needs, nor does it present a personalized recommendation to you. You must consult a financial advisor who understands your specific circumstances and situation before taking an investment decision.

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