Risk Profiling is a Revelation – The sooner the better.

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 phrases or terms that are best left to the knowledge of the financial advisor. It is imperative for an investor to know about his/her risk profile and the validity of the risk they are exposed to especially when it comes to investing in equity.

“Mutual funds are subject to market risk. Please read the offer documents carefully before investing” These lines are a statutory requirement that every mutual fund offering financial company must communicate orally or in writing when selling or advertising their funds and schemes. It is so only to educate the investor about the innate risk of these investment instruments. An individual’s readiness for risk or recovery when exposed to a risk, depends on a variety of factors.

Risk profiling is the method or 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.

Remember Risk Profiling is done by the investment advisor before arriving at an investment strategy for the investor. Every investment made from then on is based on the investment strategy. An investor’s risk profile is calculated using a financial planning tool or software.

To understand the different aspects of risk profiling a little better, let’s see it with Sudharshan’s risk profile. Sudharshan is a Senior Sales Manager in a Telecom company based in Chennai. When he approached a financial advisor regarding his investment plans, his advisor discussed with him his financial goals and all that he intends to do with his earnings and savings. After clearly laying out his financial goals and commitments, his financial advisor comes up with an ‘X’ figure which will enable him achieve all his financial goals. Now this ‘X’ figure is subject to Sudharshan willing to part with some of his saving along with a significant risk exposure ‘Y’.

Also Read: Insurance – You pay to cover for the Risk. Not for a Return.

This significant risk exposure ‘Y’ to achieve Sudharshan’s financial goals is the ‘risk required’’Y’. However, Sudharshan’s financial advisor speaks to him and educates him about his ‘risk capacity’ ‘Z’ or how much he can afford to risk in order to achieve the expected return. Sudharshan can now communicate the risk he is comfortable to take. Also called as ‘risk tolerance’ – ‘A’. This can be lower or higher than ‘Y’ In other words, ‘A’ is the call that Sudharshan makes after knowing ‘X’ and ‘Y’.

So what is the financial planning software doing after all? The software will give the optimal risk that Sudharshan can take. To put it precisely, the software gives a mid-way that will get the Sudharshan closer to his goals without exposing him to too much of risk.

What are the benefits of Risk Profiling?

Introspection into your current and future financial position: Many a time we are unable to judge our financial position, earnings and assets. A risk profiling exercise puts things in the right perspective and enables the investor enjoy his earnings apart from comforting with a sense of financial security.

Gives an idea of the expected returns or the wealth you can create: Risk profiling will involve the exercise of you listing your financial goals and making a list of all our savings and assets. This will give you an idea of how much your savings and assets would be worth in the future.

Prepares you better for life’s uncertainties: When an investor’s risk profiling is done, it will shed a lot of light upon the amount of funds that must be allocated or set aside to meet contingencies or emergencies. In a way it prepares the investor better.

It is the first step to wealth creation: Knowing your financial worth and the risk you can take to accumulate wealth or make returns on your investment is the first step an investor takes to wealth creation. This way the investor works on a well-defined investment strategy to reach financial goals which works most of the time.

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.

This article has been contributed by K.N. Sridharan, CEO WinRich