Aditya Birla Sun Life AMC Limited

How to find what's your risk appetite?

Aug 26, 2019
5 mins | Views 8953

It is always said that we must invest as per our risk appetite. But how do we determine our risk appetite? Read on to find out.

Factors affecting our risk profile

Risk appetite is a combination of multiple factors such as:

  • Age

    One of the most important factors which impacts the risk profile is the age of the investor. Lesser the age, higher is the potential to absorb risk. This is the key reason why financial experts suggest one to start saving or investing from the early days of career. There is a “100 minus age” formula that many people can follow to do their asset allocation. For instance, if someone is 30 years old, the general guideline is that 70% (100 minus 30) could be the proportion of equity in the portfolio. Though it should be noted that it is a guideline and investments should be made after taking into consideration other factors as well.

  • Earnings

    Stability of income plays a crucial role in determining one’s risk appetite. Salaried people have a consistent (and predictable) flow of income. Hence, they can go with instruments that are classified as high risk in the short-term but that can have a potential to generate higher returns in the long run. Self-employed individuals, consultants or freelancers may not receive a fixed amount every month. Hence, they need to have a higher proportion of liquid instruments in their kitty to fund emergencies. Similarly, businessmen tend to invest more in debt instruments as they need to put back a substantial part of their earnings for the growth of the business.

  • Financial obligations

    Individuals who already have loans or other financial liabilities generally avoid investments in high-risk instruments.

  • Dependents

    The number of people who are dependent on the investor financially also impacts his or her risk profile. If the investor is the sole earning member of the family and needs to take care of an extended family (spouse, parents and kids), he or she should not opt for high-risk investments. However, if someone has a working partner and no dependents such as DINKs (Double Income No Kids), they can afford to absorb higher degree of risks.

    Now that we know what factors impact one’s risk appetite, let us look at some questions that would help us determine our risk profile.

    Q: How long do you plan to work or how far off are you from retirement?

    • Already enjoying the retired life
    • Still a decade more
    • Two decades to go
    • Three decades to go
    • Just started my career

    Q: What % of your monthly income goes towards loan repayment?

    • More than half
    • Between 30% to 50%
    • Between 10% to 30%
    • Not more than 10%
    • No loans to be repaid

    Q: How many people depend on you financially?

    • Extended family
    • Spouse, kids and parents
    • Spouse and kids
    • Only spouse or only children
    • Zero

    Q: What portion of your income do you save?

    • Hardly 5%
    • Less than 10%
    • About 20%
    • One-third or less
    • More than one-third

    Q: Basis your current financial condition, do you think you would be able to reach your goals?

    • Hardly 5%
    • Less than 10%
    • About 20%
    • One-third or less
    • More than one-third

    Q: What describes your current status financially?

    • In rough waters
    • Some improvement needed
    • Content
    • Reasonably well-off
    • Doing great

    Q: How soon do you need the returns?

    • In less than a year
    • 1 to 3 years
    • Five-year plan
    • In a decade
    • More than a decade

Mostly As: Conservative. Focus more on capital protection. Debt investments can be more suitable for you.

Mostly Bs or Cs: Moderate. You can take measured risks for better returns. Start off with lesser equity and gradually bring up its weightage in the portfolio

Mostly Ds or Es: Moderate Aggressive to Aggressive. You have the financial backing that will help you digest above average risk. You can invest majorly in equity investments and balance it with some debt.

Mutual Fund investments are subject to market risks, read all scheme related documents carefully.

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