RISK PROFILING
We all know that all food items may not be acceptable to our body and our immune system may react in some way which is called allergy. All food or food items may not be suitable for every body and ‘allergy test’ can find the actual reason.
In case of investment product selection for an individual, it is necessary to know the risk appetite of the individual. Risk profiling is the process to know the amount of risk an investor is willing to accept. Assessing an individual investor’s tolerance to investment risk is a most important component of portfolio building and is critical to find suitable asset allocation.
For selection of appropriate product for any individual, there are two steps which are combined by the financial planners. One is risk appetite of the investor and other one is risk level of the investment options being considered.
Individual risk profile often changes over time for certain reasons. It is also true that for different investment horizons different risk profile is require.
Factors that affect risk appetite are :
| |
Factor |
How it influence |
| 1. |
Age |
More younger can take more risk. |
| 2. |
Skill |
Well educated and multi-skilled people can take more risk. |
| 3. |
Job |
People who are in steady jobs are in better position to take more risk. |
| 4. |
Mental Position |
Daring or fearless people generally are mentally better positioned to take risk. |
| 5. |
Earning |
a)People who earn more can take greater risk than others;
b) Regular income can give opportunity to take risk than unpredictable income.
|
| 6. |
Earning Member |
Risk appetite directly proportionate to number of earning members. |
| 7. |
Dependent Member |
Risk appetite indirectly proportionate to number of dependent members. |
| 8. |
Life Expectancy |
Longer life expectancy will enhance higher risk appetite. |
| 9. |
Asset |
People who are holding good number of asset or have handsome capital base can take more risk. |
The following are some questions to help determine your risk appetite
PART A
Question 1: What do you want to achieve from your investments?
a.I want a second source of income.
b.I want regular income and also want to see my portfolio grow.
c.I want the growth of my investment. I don’t want a regular income.
Question 2:How familiar are you with various investment products?
a.I have no experience
b.I have some understanding
c.I have good understanding
d.I am seasoned investor
Question 3
How important is it for you to minimize your income tax?
a.Not so important
b.Slight important
c.Certainly important
d.Most Important
Question 4
How long do you want to stay invested?
a.1 year or less
b.More than 1 year but less than 3 years
c.More than 3 years but less than 5 years
d.More than 5 years
PART B
Question 1
I generally look for safe investment and ready to compromise with lower return.
a.Strongly Agree
b.Agree
c.Disagree
d.Strongly Disagree
e.Undecided
Question 2
I find investment matters easy to understand.
a.Strongly Agree
b.Agree
c.Disagree
d.Strongly Disagree
e.Undecided
Question 3
Usually I take long time to decide about my investment matters.
a.Strongly Agree
b.Agree
c.Disagree
d.Strongly Disagree
e.Undecided
Question 4
I tend to be anxious about the investment decisions I have made
a.Strongly Agree
b.Agree
c.Somewhat agree
d.Disagree
e.Strongly Disagree
f.Somewhat disagree
Question 5
I feel comfortable about investing in the stock market
a.Strongly Agree
b.Agree
c.Somewhat agree
d.Disagree
e.Strongly Disagree
f.Somewhat disagree
Question 6
If I had spare funds to invest, I would choose a risky investment
a.Agree
b.Somewhat agree
c.Disagree
d.Strongly Disagree
e.Somewhat disagree
f.Undecided