Investing
Risk profiling is a revelation — the sooner the better
Ever wondered about your ‘risk appetite’ or the amount of risk you can take with all your money? ‘Risk appetite’ and ‘risk profile’ are not terms best left to the knowledge of the financial advisor. It is imperative for an investor to know their risk profile and the validity of the risk they are exposed to, especially when investing in equity.
“Mutual funds are subject to market risk. Please read the offer documents carefully before investing.” These lines are a statutory requirement, meant to educate the investor about the innate risk of these instruments. An individual’s readiness for risk, or recovery when exposed to it, depends on a variety of factors.
Risk profiling is the process of arriving at the optimal level of risk an investor can take, after considering the risk required to achieve the returns, the maximum risk the investor can take, and the risk the investor is comfortable with. It is done by the investment advisor before arriving at an investment strategy, and is calculated using a financial planning tool.
An example
Consider Sudharshan, a Senior Sales Manager in a telecom company in Chennai. When he approached a financial advisor, they discussed his financial goals and commitments and arrived at an ‘X’ figure that would enable him to achieve all his goals. This ‘X’ is subject to Sudharshan being willing to part with some savings along with a significant risk exposure ‘Y’ — the risk required.
His advisor then educates him about his risk capacity ‘Z’ — how much he can afford to risk. Sudharshan can now communicate the risk he is comfortable taking, his risk tolerance ‘A’, which may be lower or higher than ‘Y’. The financial planning software then gives the optimal risk — a mid‑way that gets him closer to his goals without exposing him to too much risk.
What are the benefits of risk profiling?
Introspection into your current and future financial position. A risk profiling exercise puts things in perspective and gives a sense of financial security.
An idea of the wealth you can create. Listing your goals and all your savings and assets shows what they would be worth in the future.
Better preparation for life’s uncertainties. It sheds light on the funds that must be set aside for contingencies and emergencies.
It is the first step to wealth creation. Knowing your financial worth and the risk you can take lets you work on a well‑defined investment strategy to reach your goals.
Call upon your financial adviser today to get risk profiling done. It’s the best way to begin your journey to creating and keeping wealth.