Be a Healthy Investor- Know Your Risk Appetite
Written on Thursday, August 13, 2015
By Team Bajaj Capital
It is often observed that first time investors get impatient with their investments and leave aside basic logic in a hurry to commence their investment journey. Before parking your hard earned money in any scheme it is very important for you to understand your risk appetite and how you can recover the market slumps. In this blog we intent to explain every possible aspect to judge your risk taking abilities, so that your investments are fruitful and don't become a burden.
To start with, let's understand what 'risk appetite' is. If we club together your capacity for loss based on your personal position, your need for returns, investment goals and your personal attitude to risk, what comes out is your RISK APPETITE. Based on the risk appetite, there are broadly three categories of investors:
You fall in this category, if you feel comfortable with high degree of risk. Aggressive investors are growth oriented and mostly include equity in their portfolio.
Investors with low to moderate risk acceptance and who wish for equitable but relatively stable income and capital growth can be placed under the moderate group. Such investors are comfortable with uncertainties in the value of their portfolio and have time to recover from market slumps.
This class of investor is ready to stand some market fluctuations, but has a low risk acceptance. They have a comparatively shorter duration for their investments to grow and want to ensure the availability for retirement or other short term financial needs.
Minimizing the risk is not a challenging job if you strike a right balance between the three factors comprising your appetite. Let's see how to do it in three steps.
Step 1- Workout your goals and tenure
As an investor you have multiple financial goals like marriage, child education, buying a house, owning a car and a planned retirement. Diversify your funds and dedicate schemes to your particular goal, this would help you to create a balance. When you have a diversified portfolio, your money is invested in different asset classes which minimize the risk of loss over a period of time. It is also a mature way of preparing a back plan for your investment. To beat the inflation factor select asset classes according to your goal and give it a required time to mature. Classify your goals to be achieved within 5-6 years as short term and over it can be placed as long term. It is recommended to keep the risk level on lower side in case of short term investments as unlike long term it might not recover the falls.
Step 2- Understand your personal attitude
Your risk attitude is always subjective. It can get inclined by recent events and experiences. When market rises we feel comfortable with the risk, when they fall we freak out. It is very obvious that an investor we don't feel comfortable with the risk of losing money. In the long run if our investment fails to produce the expected results there are chance of regret as we have been too cautious. So, keep the risk factor aligned with your appetite by diversifying your portfolio across a range of different investments.
Step 3- Explore what you can afford to lose
In order to attain assured financial growth, you need to have both monetary and emotional acceptance for the risk as you might act rashly after observing fluctuations in your portfolio. This can even be stressful especially for those individuals who are not habitual of keeping a track of market. But acting impulsively and retreating money at slight/routine instability is not a good idea. It can result in monetary loss over the long run. So, before investing ask two simple questions to yourself:
A. What will happen if you lose a certain part of your investment or even all your money?
B. How would you suffice the need of your dependents and fulfill your other financial commitments?