How To Evaluate One’s Risk Taking Appetite?

Nutan Gupta

02 Aug 2017

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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mutual-fund

Why to Choose Mutual Funds Instead of Directly Investing Into Equities?

Whether to invest in equities or mutual funds is a question that has plagued every investor. As someone who needs the best value for his/her investment should you invest in equity directly or via mutual funds?

Let’s start by first understanding what these two terms ‘equities’ and ‘mutual funds’ stand for-

Equities- Equities generally represent ownership of a company. If you own any equity in a company, you are a part owner of the said company (depending on how much equity you own).

Mutual Funds – It is an investment scheme which is professionally managed by an asset management company. It pools together the resources of a group of people and invests their money in equities, debentures, bonds and other securities.

Why choose mutual funds over equities?

For people who’ve never invested in either stocks or mutual funds, it is hard to know which is better and where to start. Broadly speaking, if you are a novice investor, mutual funds are not only less risky but also way easier to manage. Here are some ways in which investing in mutual funds is beneficial as opposed to investing in equities -

Diversification

Mutual funds provide more diversification as compared to an individual equity stock. When you invest in equity, you are investing in a single company which has its inherent risk. For example, if you invest Rs.20,000 in buying equities of one company, you could face a total loss if that particular company performs poorly in the market.  

If you invest the same amount in mutual funds, it will be invested in different kinds of stocks and financial instruments, high-risk and low-risk both, so you might not face total loss even if one company does poorly.

Scale of Investment and Lower Costs

For an individual investor buying and selling stocks is a difficult task due to its high price. Thus, any gains made from stock appreciation are nullified if the overall trading costs are considered. Comparatively with mutual funds, as the money is pooled from a large number of investors, the cost per individual is lowered.  

Another advantage of mutual funds is that you don’t need to invest large sums of money. Buying equities for a profitable venture needs huge amounts of money, a minimum of few lakhs. With mutual funds, you can start with Rs.1000 and earn profits on that as well.

Convenience

Keeping an eye on the markets everyday is a time-consuming business, especially if you are investing as a side gig. There are people who spend their lives studying the market and still end up sustaining heavy losses. Though investing in mutual funds does not guarantee high returns, it is stress-free and needs less work as compared to investing in equities.

To sum it up

It is important to remember that mutual funds have their own disadvantages as well. Thus, as with any financial decision, educating yourself and understanding the suitability of all the available options is the ideal way to invest. 


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How To Evaluate One’s Risk Taking Appetite?

Nutan Gupta

02 Aug 2017

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.

Have Referral Code?