Best investors spread their money into different baskets rather than investing all their money into one basket. Remember what our elders told us “don’t keep all your eggs in one basket”. That said, you need to remember that you are investing your hard-earned money in different asset classes. Thus, it becomes pivotal for you to identify your ideal risk profile to mitigate markets risks while deriving the most out of your portfolio. This becomes crucial because every individual possesses a different risk appetite.
The risk appetite that an investor possesses often decides the portfolio composition, asset weightage, investment efficiency, and potency of returns. An investor’s risk profile builds the all-important awareness of the overall risk appetite with regards to key capital investment decisions while determining the investor’s natural risk taking propensity based on current financial position. As an investor, it is very crucial for you to note that the returns on your investment are directly proportional to the risk you are willing to take to achieve those returns. Thus, higher returns would involve higher risks and vice versa.
The two major factors that become vital here are your desire levels in terms of returns and your capacity to take risks to get those returns from your investments. This build relevance for Risk Profiling, which tells you whether you are a very aggressive, aggressive, moderate, or conservative investor. Very Aggressive profile suggests that as an investor, you are more willing to take higher risks to derive higher returns. Aggressive profile indicates that you are willing to take higher risks to derive higher returns, but within an acceptable limit. Moderate profile indicates that you are only willing to take moderate risk and are happy getting medium returns from your portfolio. Conservative profile suggests that as an investor, you do not want to take any kind of high or moderate risk and are very happy with lower but steady returns.
How does risk profiling help in terms of planning your portfolio?
Very Aggressive profile – Equity heavy portfolio (around 75%) with least debt exposure
Aggressive profile – Higher Equity exposure (around 65%) with normal debt exposure
Moderate profile – Equally balanced debt-equity portfolio (around 50% each)
Conservative profile – Least equity exposure (around 30%) with highest Debt exposure
Once you know your profile, you will in the best position to work out an ideal asset allocation strategy based on your risk profile across different asset classes such as Equity, Debt, Gold, and Cash. You can start aligning your portfolio allocation based on your risk profile. For instance, if you are an aggressive investor, you can go equity-heavy by investing a major chunk of your savings in equity instruments such as stocks, IPO, MF SIPs, NFOs, OFS, and Corporate FDs. You can park rest of your allocated savings in debt instruments such as bonds, debentures, and NCDs. Thus, the returns that you would derive from your portfolio will be in sync with your expectations and risk propensity. Risk profiling would help you build an efficient portfolio, which not only maximizes your returns, but also mitigates your risks largely while making you enjoy a customized investment experience that matches your financial goals and income.
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Disclaimer: Investment in securities market are subject to market risks, read all the related documents carefully before investing.