How to assess your risk profile?

Madan was averse to risks and yet, on his friend’s suggestion, he invested his hard-earned savings in stocks. When the market crashed due to the COVID pandemic, Madan made terrible losses on his stock investments and cursed his decision to invest in stocks in the first place.

Making wrong investment choices is not uncommon and the above-mentioned story might resonate with many of you. When investing, it is essential that you invest as per your risk appetite. Risk profiling is, in fact, the most important requirement before picking investments for your financial goals and yet, many of you ignore this part.

One of the main reasons for ignorance is lack of knowledge. How many of you understand the meaning of risk appetite?

What is risk appetite?

Risk appetite, in simple terms, means your risk taking capability. Risk profiling measures how comfortable you are with market-related risks when choosing investments. If you do not like taking risks at all, fixed income instruments should be your choice of investments while if you can handle risks, you should invest in equity oriented schemes.

How to assess your risk profile?

There is no set formula for assessing your risk profile. Your risk appetite depends on various factors which are as follows –

  • Tolerance for absorbing market risks
  • Age
  • Financial goals and their horizon
  • Understanding of the financial market and its instruments
  • Research done before investing in a particular avenue

How to invest according to risk profile?

Here’s a quick look into the preferred investment avenues which you should choose based on your risk profile –

Risk profile Investment exposure
Very low risk tolerance Debt – 90% to 100%

Equity – 10% to 0%
Low risk tolerance Debt – 70% to 90%

Equity – 30% to 10%
Medium risk tolerance Debt – 40% to 60%

Equity – 60% to 40%
High risk tolerance Debt – 10% to 30%

Equity – 90% to 70%
Very high risk tolerance Debt – 0% to 10%

Equity – 100% to 90%

So, before you invest, assess your risk profile and then choose the investment avenues. Also, rebalance your portfolio regularly so that it coincides with your risk profile.