How does Risk Profiling Affect your Investment Decisions?
Why it makes sense for you to take the risk assessment
“Are all Mutual Funds risky?”
Most mutual funds do have some level of risk depending on which elements they are composed of. Equity as an element is riskier in nature, because it is a part of the stock market.
Debt as an asset class is safer or less riskier because it is made up of fixed income instruments.
But to understand how risky a mutual fund is or how much of a difference it would make to your portfolio, you need to first know how much of this risk are you prepared to accept.
What is risk profile assessment?
In very simple terms, risk profile combines your willingness to take risk with your money with your ability to take such risks. Taking risks with your money means, being able to absorb the potential downside of your investments. Therefore, knowing your risk profile before you start investing is very crucial.
Why does taking a risk assessment make sense for you?
Every investor is unique, with a unique set of characteristics, therefore, each one would have a different profile. So just because your peers at work are experimenting with equity, shouldn’t mean you could do it too.
In simple words, a 25 year old with a 6 figure income & no dependents can afford to take high risk with his or her money, as s/he has age on their side to recover any downside to their investments. This means, they would be classified under the Aggressive investor bracket; our recommendation would be to invest in equity heavy mutual funds & to stay invested for the long term.
But, a 25 year old, with dependent parents, a spouse, and a lower income, even though has age on his/her side, could be classified in the Moderate or Conservative category. He or she must invest in debt-heavy mutual funds. Their primary goal is capital protection, while earning higher returns than what a bank fixed deposit would provide.
How Paytm Money helps you know your risk profile?
On our app, you will find a systematic risk assessment mechanism. The questionnaire asks you some very relevant questions, regarding your age, income, goals & investment horizon.
To know your risk appetite, tap on the top left corner menu, tap on ‘Risk Profile’, & ‘Take Assessment’.
Some of the questions are:
- How many dependents do you have?
- What is the range of your annual income?
- What is your age?
- What is the goal of investing?
- How long do you plan to stay invested for?
Once you complete the assessment, we calculate your total risk score, which classifies you in any one of the following investor profiles:
- Low Risk Investor: Your priority is to protect your capital while looking for returns higher than inflation.
- Conservative Investor: While you would like to preserve your capital, you are okay with low fluctuation to achieve returns higher than fixed deposit
- Moderate Investor: You prefer a consistent growth pattern with some fluctuations in expected returns.
- Growth Investor: You are willing to take moderately high risk with your money to achieve potentially high returns.
- Aggressive Investor: You want to achieve long term growth and are comfortable with loss in the short term.
To know the right allocation for your unique risk profile, explore our Investment Packs before you start investing in the not-so-risky mutual funds :)
PS: Explore Investment Packs, once you are done taking the risk assessment, and invest in the basket of funds that are recommended by our in-house advisory team, based on your risk profile.
