Every investor should know about risk profiling and invest according to their risk appetite. So here the question arises what is risk appetite, it is nothing but the level of risk that an individual is prepared to take or accept to achieve his goals.

Risk profiling is important for determining a proper investment and the right asset allocation for a portfolio. Every single person has a different risk profile as the risk appetite depends on psychological factors, loss bearing capacity, investor’s age, income & expenses and many other things.

Try to understand with an example:

Suppose there are two friends and one had a fever for 2 days, he visited the doctor and the doctor prescribed him 2-3 medicines and some tests according to symptoms he had having. After a few days another friend got too ill, can he take the same medicine which was prescribed to his friend? , the answer will be an absolute no.

So in the case of investment everyone has a different risk appetite, so check before investment if the fund is according to your risk appetite or for better suggestions always take advice from a financial doctor.

Conservative Investors: – According to psychological or any other reason they are always ready to adjust with low return and do not take much risk. So they mostly invest 20-30 % in equity and 70 % in debt or others.

Moderate Investors: – Looking for relatively higher returns over the medium to long term with modest risk.
Asset allocation: – 50-50%

Aggressive Investors: – Willing to take significant risks to maximise returns over the long term.
Possible Allocation – Equity: 80%-90%; Debt and others: 0-10%.

Risk profiling can be changed with time, goals and your income and expense. So here you need a portfolio manager to review your existing portfolio and change it according to your goals for better and goal-oriented investment.

Mutual funds help you invest across asset classes as per your risk appetite. If you are investing in debt or equity through mutual funds, you can choose a mutual fund category depending on your risk appetite and time horizon.

At the time of financial planning, your financial advisor can help you take a short and simple risk assessment to help you determine which category you fall under. Based on this, he/she can determine what proportion of your portfolio should be invested in which asset class.

Other than risk appetite, there are so many investment risks present in the market. When you invest, you’re exposed to different types of risk.

A possibility that actual returns are less than expected returns. Different investments have different types of risks.

Liquidity risk: Suppose you buy a painting and you think in the future, the value will increase and you can sell it and recover your investment. After one year you need money and you think of selling the painting to recover money. But finding a buyer who can give you the value today itself. There is no guarantee of that. Liquidity risk is the same kind of risk where the possibility that your assets cannot be converted into cash easily and quickly.

Interest rate risk: Suppose you have invested when the bond was issued, you paid Rs 1000, you are happy with a 7% return and you plan to hold the bonds for the term of 10 years However what happens to your return if, six months later, the market starts demanding 6.5% on this bond? Instead of remaining a nice steady Rs 1000, the price changes to Rs 964 to reflect the new required return. Interest rate risk will always be present to some degree in bond investments.

Inflation risk: Usually there is 5%-6% inflation every year which means your money is not growing by 5%-6% every year indirectly you are losing that much money. We can say that inflation is an invisible thief that reduces the value of your investment.

Market risk: The risk that the value of your investment will change due to demand and supply also because of market depreciation, changes in prices. You can manage market risk by staying invested for the long term. In the short term, the market risk is quite high.

Credit Risk/Default Risk: Credit risk comes at the time of secured or unsecured bond. The risk is that whatever money you invest won’t come back to you because of insolvency. In this case, your principle or the money you invest is at risk of default. The risk is there in fixed income instruments. That’s why blindly investing in fixed income instruments only by checking returns is not a smart decision.

When you lend money to someone as a loan or when you invest in Bonds or in FDs. You also take on credit risk.

Political Risk: A possibility that government policy changes can change the value and returns of your investment. The risk that businesses, investors and governments may face when there is a change in politics or political outcomes.

Macro political risk: The adverse political condition that affects all foreign countries’ investment in each country it operates in.

Micro political risk: It is sectorial related, that affects a particular industry that comes with uncertainty related with outcomes or events from political processes.