Investor Risk Profiling
Our risk profiling method is a process for finding the optimal level of investment risk for your client by balancing their risk required, risk capacity and their individual risk tolerance.
Risk Required is the risk associated with the return required to achieve the client’s goals from the financial resources available. Based on the client’s goal to say have X amount in n years we determine the required rate of return based on his income and assets and classify him in a conservative, moderate or aggressive investor group and give him allocation to risky and risk-averse assets based on that.
Risk Capacity is the level of financial risk the client can afford to take. Following are the key metrics on which we base the risk taking capacity -
- Measure of Wealth: Also subjective, partly depends on investor’s perception of their wealth relative to needs
- Time Horizon/Stage of Life: The longer your time horizon (the younger you are) the greater your ability to take risk
- Family Members/Dependents
- Qualifications and ability to generate a steady income
- Ability to withstand portfolio losses: The larger the shortfall an investor can tolerate before jeopardising their goals the greater their ability to take risk.
Risk Tolerance is the level of financial risk the client is emotionally comfortable with. This is more of a behavioural aspect of the client risk preferences and can be determined using a psychometric questionnaire. A sample questionnaire is attached in the appendix.
We evaluate the user risk profile based on following criteria:
Stage in Life
Which of the following describes your current stage in life?
Knowledge
How familiar are you with investment matters?
Experience
How long have you been investing, not counting your home or bank type deposits?
Investment Horizon
How long would you invest the majority of your money before you think you would need access to it?
Spending
Once you start using your invested money, how long would you need it to last?
Extreme Risk Scenario
In January 2008, the Indian share market fell by more than 17% during a month. If the share market component of your portfolio fell by more than 20% what would you do ?
Short Term Drawdown
If your investment fell by more than 6% over a short period you would?
Choice of Portfolio
Which scenario is most preferable?
Investment Preference
Which one of the following statements describes your feelings towards choosing an investment?
Security
How secure is your current and future income from sources such as salary, pensions & other investments?
Score
Add up the points you scored for each answer. Based on your score, your risk profile is defined as:
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