Article

How To Evaluate One’s Risk Taking Appetite?

02 Aug 2017 Nutan Gupta

A person’s appetite for how conservative or aggressive he or she is usually based on their expectations and the funds' ability to fulfill the goals. Like in any decision regarding purchase, it is important to be clear about the investment objective before you decide to buy.

The effective application of risk appetite is to understand the personal risk tolerance and how that should apply to your investment strategy. Understanding your appetite for risk is important to make decisions about your portfolio, during times of change and volatility in the market.

Mutual funds are based on the risk profile of a person:
A conservative investor's primary objective is to preserve the capital and receive regular income. They have a low tolerance for risk and hence a major chunk of their investment should be allocated to debt or money market mutual funds like income schemes, FMPs, etc.

A moderate aggressive investor is the one who is willing to take controlled risk for moderate returns. Such investors are generally recommended a mix of balanced income and index schemes so that they can benefit from a balanced portfolio.
Aggressive investors consider risk as an opportunity and leverage their experience and knowledge to take intelligent financial decisions. The major share of their investment, therefore, goes to growth and equity schemes.

The following factors will help you to measure your risk tolerance and appetite level:
1) Your income is determinant to gauge your risk tolerance. Depending on the income level that you have, the more comfortable you are to take risks with your investments. Your disposable income is another thing to take into consideration.

2) It is observed that the investor's risk appetite generally declines with age. With increase in age, the amount of earning active income reduces. This is because you would not want to invest in high-risk assets when you are about to retire. Proper safety of your present investment might be your topmost priority instead. Hence, age plays an important factor in determining your risk tolerance.

3) Financial responsibilities such as education, marriage, loans, etc. needs to be met before you expose your portfolio to high volatility. This is so because even if you face some loss initially, your dreams are less affected by that.

4) The deadline i.e., how close or far you are from meeting your financial goals also helps you determine your risk appetite. If the goal is in the short-term, you might consider taking a larger risk than as compared to a long-term goal. This is because short-term risk might give you quick and high returns. 

5) There should be sufficient liquid cash as savings in case you meet with any financial emergencies. This is because you might not be able to liquidate your savings as fast as compared to your savings or emergency fund. A suitable Life Insurance cover is also essential to provide financial security to your dependents in case of any unfortunate event. 

6) Knowledge about various investment options and market will increase awareness. Being aware of the risks and preparing for the good and bad effects might help you push your risk appetite up.

In a nutshell
Risk is not for all. It’s an animal that only the brave one can tame. If you wish to take risks with your portfolio for better returns, ensure that you consider all of these factors well.

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How To Evaluate One’s Risk Taking Appetite?

02 Aug 2017 Nutan Gupta

A person’s appetite for how conservative or aggressive he or she is usually based on their expectations and the funds' ability to fulfill the goals. Like in any decision regarding purchase, it is important to be clear about the investment objective before you decide to buy.

The effective application of risk appetite is to understand the personal risk tolerance and how that should apply to your investment strategy. Understanding your appetite for risk is important to make decisions about your portfolio, during times of change and volatility in the market.

Mutual funds are based on the risk profile of a person:
A conservative investor's primary objective is to preserve the capital and receive regular income. They have a low tolerance for risk and hence a major chunk of their investment should be allocated to debt or money market mutual funds like income schemes, FMPs, etc.

A moderate aggressive investor is the one who is willing to take controlled risk for moderate returns. Such investors are generally recommended a mix of balanced income and index schemes so that they can benefit from a balanced portfolio.
Aggressive investors consider risk as an opportunity and leverage their experience and knowledge to take intelligent financial decisions. The major share of their investment, therefore, goes to growth and equity schemes.

The following factors will help you to measure your risk tolerance and appetite level:
1) Your income is determinant to gauge your risk tolerance. Depending on the income level that you have, the more comfortable you are to take risks with your investments. Your disposable income is another thing to take into consideration.

2) It is observed that the investor's risk appetite generally declines with age. With increase in age, the amount of earning active income reduces. This is because you would not want to invest in high-risk assets when you are about to retire. Proper safety of your present investment might be your topmost priority instead. Hence, age plays an important factor in determining your risk tolerance.

3) Financial responsibilities such as education, marriage, loans, etc. needs to be met before you expose your portfolio to high volatility. This is so because even if you face some loss initially, your dreams are less affected by that.

4) The deadline i.e., how close or far you are from meeting your financial goals also helps you determine your risk appetite. If the goal is in the short-term, you might consider taking a larger risk than as compared to a long-term goal. This is because short-term risk might give you quick and high returns. 

5) There should be sufficient liquid cash as savings in case you meet with any financial emergencies. This is because you might not be able to liquidate your savings as fast as compared to your savings or emergency fund. A suitable Life Insurance cover is also essential to provide financial security to your dependents in case of any unfortunate event. 

6) Knowledge about various investment options and market will increase awareness. Being aware of the risks and preparing for the good and bad effects might help you push your risk appetite up.

In a nutshell
Risk is not for all. It’s an animal that only the brave one can tame. If you wish to take risks with your portfolio for better returns, ensure that you consider all of these factors well.