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Risk Profiling Is A Necessary Step Towards Safe Investments

An investor’s understanding of his or her risk appetite is an essential component of product choice. That’s why risk profiling is a necessary step. Here’s how it plays out.

Risk Profiling Is A Necessary Step Towards Safe Investments
Risk Profiling Is A Necessary Step Towards Safe Investments

Investments should be made according to your risk profile. Risk profiling is essential in financial planning to determine proper investment asset allocation. Every individual has a different attitude and behaviour towards risk based on age, loss bearing capacity, family structure like the number of dependents, liabilities and, most importantly, time available to achieve the goal.   

Various websites offer risk-profiling tools or questionnaires. Many mutual fund companies also provide risk profiling tools online for free. For further analysis and determination of risk profile, you can also approach a financial advisor.   

Mutual Fund Investments
Mutual Fund Investments

Below are a few examples of risk profiles and what such investors can do for different goals.  

Conservative: Investors are not willing to lose the capital at any cost. If the time to achieve the financial goal is short, such investors can allocate 0-10 per cent in equity and 90 per cent and above in debt-related instruments.   

Moderate Conservative: The investor is unsure yet willing to take risks in exchange for slightly higher returns with moderate to conservative exposure in equity. For medium-term goals, if the investor is comfortable with medium risk and medium returns, the allocation can be 10-30 per cent equity and 70-90 per cent debt.  

Moderate: Investors who are willing to take a higher risk to get a relatively high return. Such investors may be looking at moderate risk and moderate returns over the medium to long term. The allocation can be 40-60 per cent in equity and 60-40 per cent in debt and related instruments. 

Moderately Aggressive: The investor is aware of a higher equity allocation, and investments are for the long term. The equity allocation is 70-90 per cent and 10-30 per cent in debt and related instruments. This kind of allocation is a moderately high risk to get higher average returns. 

Aggressive: The investor is well aware of the risk in investing 100 per cent in high-risk equity and understands the market volatility. The investments are made for a longer tenure as the investor knows that the market may go down and temporarily take away a significant chunk of the capital. The allocation would be 100 per cent equity, and the risk level would be high. 

The author is a financial coach at Luhem.

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