risk appetite – determine your risk appetite before starting investment journey

When investing in the stock market or any financial instrument, the first thing fund managers ask is your risk tolerance level. Based on that, it is decided whether the said investment is suitable for the investors or not. But, if the answer is based on the emotional aspect, then there may be something wrong with the investment. Because the first rule of investing is to put your emotions aside and invest based on circumstances and goals.

So, let’s learn some of the most important lessons for determining risk profile before starting your investment journey.

Assess financial goals

First understand your short-term and long-term financial goals, such as buying a home, saving for retirement, or financing your children’s education. Goals can be influenced by how much risk one is willing to take. Also, financial goals can be prioritized based on necessity. For example, retirement planning is something that cannot be avoided. Hence risk of loss of capital cannot be taken. It should have a diversified portfolio with debt funds to minimize risk and equity exposure.

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Evaluate the duration

Understand how long you intend to hold the investment. Generally, the longer the tenure, the more risk can be taken. Because there will be more time to recover from potential losses. For example, if you are investing to buy your dream home 15 years from now, you can invest in value stocks, increasing your investment proportionately every year.

Analyze the financial situation

Assess your current financial situation before investing, including income, expenses, debt and assets. Understanding the financial situation will help determine how much risk can be taken. If the debt is more than 30% of the income, it is better to focus on debt repayment and invest in fixed income securities. Because it reduces the risk of losing the invested capital.

Conduct risk assessment

Many financial institutions provide risk assessment questionnaires to help determine the risk profile. These questionnaires typically ask questions about financial goals, investment experience, and risk tolerance. The financial institution will assess your risk profile based on the answers.

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Number of dependents and investment

The number of dependents in your investment is an important indicator to determine the risk profile. If you have a whole family to feed and you are the only earning member, it is not advisable to invest in high risk securities. Financial uncertainty can affect your family badly. On the other hand, if you start earning now and have no family responsibilities at present, you can invest in equity and take risk in the hope of better returns.

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