How important is it to understand one’s risk profile before investing?

Risk and return are two sides of a coin 

There are two sides of the same coin, Risk and return. High risk comes with high return and vice versa. The necessary risk to earn the excess return must be taken. A person investing in an FD as he feels is secure but worried about inflation eating up his returns or a person investing in mutual equity fund gives knee jerk reaction to any market change that doesn't invest according to their risk appetite. The first person is clearly willing to take more risk, and the second person is not. Once they start investing, knowing their own risk profile is very important.

In addition, what one person may suit may not suit the other. Each individual has a different risk capacity. Just because an individual invests in a low-risk product does not mean that the others also have to invest in it. The mentality of the herd does not work to invest.

What is risk?
Risk refers to the extent of an investment's uncertainty or potential loss. As the risk increases, investors are looking for higher returns to offset the risk. Multiple factors determine the risk. The factors that determine a person's risk appetite are age, income and expenses, the number of dependents on their income, loss-bearing ability, and the psychological factors of the person. All of these things make up a person's risk profile. A person with lower age, higher income, lower expenses, high-risk capacity for carrying, and less dependents may have a high-risk appetite than others. The risk profile has to fit the investment made. Through evaluating their risk appetite and contrasting their returns, it is possible to understand which asset classes best suit them.

How can one reduce the risk in their portfolio?
Diversification in a portfolio is the key to reducing risk. A balance of multiple asset classes in a portfolio will help to reduce risk. Investment diversification can be achieved by equity, debt and balanced mutual funds. Investment of mutual equity funds in equity markets. You will find multiple choices like the large, mid, small and multi-cap options. Debt funds invest in different corporate securities, government bonds, and instruments on the money market. They give a better return than the traditional FDs. Balanced mutual funds are hybrid instruments of debt and equity. They strike a balance between the two asset classes. It's like getting both worlds to be the best. It is better to avoid sector-specific and thematic funds if one has little or no industry knowledge.

Asset allocation based on determinants of risk appetite
It is always possible to invest based on their age. The early one is beginning to invest the higher the risk it can take. People in their 20s can take more risks than those in their 50s. Therefore, it is always better to start early investment in life, take more risk and earn high returns. Our duties do so as one grows in age. One needs to actively monitor our age-based asset allocation. Having regard to equity as a volatile part of the portfolio, it is important to have different equity allocations at different ages. The risk appetite will decline as age increases, so will the allocation of capital.

Investing on the basis of earnings is easier. When income increases investment should also increase. Increasing the investment every year by 5-10 percent could help you reach your financial goals faster and accumulate large amounts at the end of the target period. Increasing investment every year can also help to overcome inflation.

One must focus on reducing their unnecessary spending as major spending increases as age rises. Try to cut costs and invest every extra rupee.

A person who panics for every small drop in the market is a person who does not want to take the risk. He / she should look to invest in less risky assets. An individual in search of more returns and who is optimistic about the market may take more risks than a person can bear on the market. Psychological factors of an individual often play an important role in assessing a person's risk appetite.

Conclusion
Before investing, it is very important to understand your risk appetite. Otherwise the investments are going to be too risky or risky to reduce the returns. Age is the key factor in determining a person's risk profile. A younger person should be at greater risk than an older person. As revenue increases, the investment increases. Comprehend your appetite for risk and invest accordingly. We help you invest in line with your goals and risk capacity building. Come and see what we have to offer you.
Happy investing!

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