Why you need to Understand your Risk Profile before you go Investing


Risk Profile

Let’s say you want to purchase a house. You meet a realtor who greets you and straightaway starts showing you some properties.

He presents you with condos, villas, apartments, flats, bungalows and what not. But while looking at them you’re wondering, the guy didn’t even ask me what my budget is or the kind of house I’d prefer or how many rooms I need or the locality where I want the house. How can he even suggest me options without knowing about my needs?

Let’s take a second scenario.

You’ve decided to purchase a car. You go to a showroom and the sales rep there, without first asking you about your budget or your preference in terms of petrol / diesel or the number of members in your family, straightaway starts showing you some options in sedan, hatchback, crossover, SUV, etc. Would you really be able to make a good choice when you know that whatever suggestions the sales rep is making are all fluke as he doesn’t know about your needs?

In investments as well, you’ll often find just about everyone (including your financial planners, investment advisors & your investment gurus residing in your locality) giving you suggestions on where should you invest without first asking you anything about your aspirations or about your risk taking abilities. And this not only makes for bad investment choices but unfulfilled goals as well.

And this is where the concept of “Risk Profiling” comes.

Before making any investment recommendations, it’s important to first understand the kind of risk appetite an individual has, in short, their risk profile. The reason being everyone has different liabilities, different incomes and different goals to pursue and as such, the same investment options cannot fit everyone.

Let’s take an example.

Let’s say both you and your dad are looking to invest some money. Now, the difference here is not just of the age group. Your dad, given that he might be approaching his retirement years, might want to take less risks while you, for someone who’s still in the infancy of his / her career, can be a little riskier. Another differentiating factor could be the liabilities you both would be having or the goals you two might want to invest for – retirement for your dad & a foreign vacation for you.

Following are the things we ask our investors before they begin, to suggest them the tailormade & best investment options.

  • Gender
  • Age group
  • Marital status
  • Kids, if any
  • Any loans
  • Investing in shares / mutual funds
  • Saving in bank deposits

Once done, we map every investor, on the basis of their answers, to one of the three risk profile – Conservative, Practical & Adventurous.

  • Conservative – The nature of a Conservative investor is easy-going. You have a smaller risk-taking ability and should invest in low-risk funds, with low but predictable returns.
  • Practical – The nature of a Practical investor is confident. You have a medium risk-taking ability and should invest in medium-risk funds with possibility of better than average returns.
  • Adventurous – The nature of an Adventurous investor is aggressive. You have a higher risk-taking ability and should invest in high-risk funds with possibility of uncertain but high returns.

So, not just you but get your near and dear ones also to evaluate their risk profile once, before they start any investments. Or even if they aren’t looking to do any investments right now, you can still ask them to check their risk appetite as it’s generally good to be in the know of it.

Written by

Anand Vatsya