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Understanding your risk profile is the important part for an investor before making any investment decisions. Proper understanding of risk appetite enable one to choose correct investment products that suitable to his risk profile. Entering to investment world blindly, will cause you lose as well as pains if not getting your expected results. For example and average investor with who is conservative and not willing to suffer any lose from the investment should not select 90% of his investments in equity. Else, he has to choose more guaranteed debt investments for his portfolio.
Once you have found the answer for how much risk you can take and confident on that, second part is the investment product selection. There is a truth in investment world, those who requires high returns with minimum risk is merely impossible. The secret of returns entirely connected with risks. An investment product that give maximum returns, should have maximum and were a product providing maximum guarantee to the capital has minimum risk as well as returns.Here is a scenario to show what is the exact meaning of risk. A person who is willing to take a duty free lottery, which have higher purchasing costs, to participate the draw were the prizes are fabulous. He is well aware, once if he doesn’t get the prize, the entire money he spent for purchasing the lottery, it may be equal to or more of his one month salary, will give a 100% lose for him. Even though, for the possible high prize and considering the little amount of people who is participating to the draw because of high lottery price, he is just forgetting the risk and entering to draw by paying a large amount.This is just a matter of a lottery and of course it is not an investment but, a gambling. I would like to informing you the possible returns to a person entirely depends on his risk taking capacity.
In both, high risk and low risk, there is an another error can expect. Selection of the wrong product and an imbalanced portfolio can cause negative impact to your long term goals and objectives. This is also a reason for an investor to identify his risk profile and return objective prior to start investing. A simple method to assess and identify the risk profile is using the psychometric tests that combined with discussions. Once you identify the risk then it can be managed by balancing your investment portfolio in the proper proportion of equity or debt instruments.
When entering to investment world there are some minimum points an investor should remember always:- The nature of stock market is always fluctuating. If fluctuations are not there, there is no return and no investments possible. So be a patient investor buy avoiding the panic nature on stock market fluctuations. A carefully selected stock investment with long term perspective will certainly give proper returns in a longer run.
– The style of systematic investment approach will eliminate and manage the risk properly. The major advantage of systematic investment is, an investor can invest at any time by not considering the market trend as well as he can start investment with very little amount. This will also make an investor as a disciplined investor.
– Diversification of investment is a must part to fail proof your portfolio. Identifying your risk will make you able to select your investment products from the wide range of equity and debt products such as mutual funds, stocks, real estate, gold, FD’s or any other secured debt products.
– If you are a tax payer and what to save tax, plan it in a monthly basis. You can see people running at the end of financial year to invest bulk amount to the products to declare there tax returns. This is absolutely a wrong approach. Plan it systematically and stick with that policy.- Performance of the investment product is not depends any aspects. i.e. the past or present performance of an investment product is not the guarantee for future performance. Have an on your investment always as well as the stock market and debt market. It is not required to watch the portfolio minute by minute. But, at least once in a month, you should monitor your portfolio performance. This will enable you to find and avoid the wrong candidate before they turn into red.- Get the advise from carefully selected professionals. Remember, this is the part where most of the investors committing mistake. Selection of an investment adviser required little study on his past qualification, style and the performance. I am in preparation on an article, providing the must have and considered qualities for a financial planner, soon.Now is the time to give you an idea of ideal asset allocation for the people who has different risk profiles. For ease the chart, I will group the investors into 4 groups: Conservative, moderate, aggressive and very aggressive.
1. A person who falling into the “Conservative” group, hasn’t have the ability to take risk. So his ideal portfolio should have majority of debt instruments. A good proportion for his portfolio can be:
– Equities = 0 – 10%- Debt (both income and government securities): 25 – 50%- Cash (Fixed Deposits, Fixed Maturity Plans and Liquid Funds): 40 – 75%
2. One who is into the “Moderate” group can prefer the following portfolio proportion:
– Equities: 20 – 40%- Debt (both income and government securities): 45 – 40%- Cash (Fixed Deposits, Fixed Maturity Plans and Liquid Funds): 35 – 25%
3. For those who are coming into little riskier “Aggressive” group can option to the following:
– Equities: 60 – 80%- Debt (both income and government securities): 30 – 15%- Cash (Fixed Deposits, Fixed Maturity Plans and Liquid Funds): 20 – 10%
4. A group of “Very Aggressive” personal can park there money in the following manner:
– Equities: 80 – 100%- Debt (both income and government securities): 15 – 10%- Cash (Fixed Deposits, Fixed Maturity Plans and Liquid Funds): 5 – 0%In my opinion, this group is suitable for someone between the age of 22 – 25 with enough income. He have lots of time in front of him to make money again once hw caught with a heavy lose. A person nearby retirement should not choose this option and instead, he can be have a conservative approach.
Find out your risk levels and act for the investments as per the above mentioned proportion.