You need to explore your personal investment strategy before you take money out of your pocket for investing. How much or how little risk you are prepared to take with your money? In the process of assessing your risk appetite you confront few questions that can be answered by you and only you.
Before you finally make investments, it is important to know your risk profile to enable you to choose the wide range of products available in the market that suit you best. If you aggression in your style, equities are for you. Conservative investors should stick to the debt basket and those falling in between the two categories can choose a mix of equities and debt accordingly.
Risk profiling is the assessment process to find out individual’s willingness to take risk. This is a highly elaborative process which tries to gauge the risk tolerance level of the investor after taking into account various parameters like, understanding and acceptability of risk in different situations of life. Though the risk profiling is mainly meant to make investment decisions but it is derived from reactions to different life situations. This is just like knowing your strength and weakness before going to war.
“the more you sweat in peace, the little you bleed in WAR “
One of the life’s most unpleasant surprises is to discover you have suffered a significant loss because you underestimated the risk involved. Similarly, it can be almost as disappointing to find you have not made the most of your opportunities because you overestimated the risks involved. While making investments, it is as important to understand your reaction to different outcomes as it is to understand the probable outcomes. Risk profiling is just like basic Blood Pressure check , to decide on how fast you can or should walk/run on a treadmill, When to slow, when to stop.
Your risk taking ability determines the Defensive and growth assets that will be there in your portfolio. Once you know how much volatility can you handle then only you can decide what equity allocation you should have and in what funds.
So, as you are gung-ho about embarking on an investment strategy, read on for these quick checks.
Most important facet to be considered before you jump in arena of investing is to take stock of your loans and liabilities. Generally, the EMI payment is deducted from your bank account. Just make a note of them. Apart from loans, liabilities includes monthly expenditure towards the upkeep of our family, school fees, compulsory medical bills that are not covered by insurance etc. Make sure you are handling it with ease before launching yourself in investment.
The younger you are, the higher risk you are willing to take as responsibilities are usually not that much. Further when you invest early you have longer time to reap rewards of compounding. Also, there is more opportunities to pivot and make amends and add ons for any bad investment made. So, age is very important factor.
Apart from your income its steadiness is another major factor which contributes to your risk profile. Are you in a stable job which pays you enough to cover all your needs with ease?
4. Contingency Fund:
Do you have adequate money to cover your emergency financial situation? A yes to all these questions will push your risk capability to a higher level. Before you start investing make sure you have your contingency fund in order as you might not be in a position to use your investment when you need money badly. In such scenario you might have to incur huge loss. This will not just rob you financially but you will also be losing an opportunity.
5. Investment time frame :
Time mitigates the risk of any investment. The longer we are willing to stay invested, the higher the risks that we can afford to take. Moreover more will be magic of compounding with longer investment time frame.
6. Investment Mindset :
Here we need to understand the difference between the long term mindset and capital protection mindset. Sometimes we join the group of investor with long term view but as we hit the doldrums, panic selling is where we participate in. With the right mindset we should try to accumulate more when everyone is selling cheap and hold our position tight.
7. Nearness of financial goal :
If you are several years away from your financial goal you can afford to take more risk. However, if you are not too many years from your goals it is more prudent for you to be risk-averse and save your capital to grab the goal you have set in the past.
REMEMBER, every investment be it equity, real estate, mutual fund etc carries risk before you reap profit from it. Every investment also has gestation period attached to it. So, we need to know the risk and the gestation period associated before you start investing.