Most investors look for investment avenues where they could achieve very high returns at least minimal risk of losing money. But in reality risk and return go hand in hand i.e higher the returns, higher the risk and vice versa. Hence one of the key elements that an investor must look into before placing all the capital in an investment like stocks, PPF, NPS, fixed deposits, mutual funds, etc.. is his/her “Risk appetite”.
In short risk appetite can be defined as the amount of risk an individual or organization is willing to bear based on their goals and expected returns. Therefore, while choosing an investment option you have to check your risk profile and match it with the associated risks of the product before investing. Doing so will help you estimate the immensity of risk based on your objectives and expected returns.
How to evaluate your Risk Appetite?
- Surplus:
If you have a high surplus amount say Rs. 1 crore, it denotes that you could take a higher risk without worrying about small losses. To be precise even if you face a loss of say Rs.1-2 lakhs due to volatility of the market while you have a surplus of Rs 1 crore, it may not affect you at all. Though if you bear the same loss with an investible surplus of Rs 5 lakh, it may significantly affect your financial health and goals. That means you can follow an aggressive approach when you have a higher surplus, but you should be cautious when you are investing with less capital.
2. Arrange Goals:
Financial goals can be classified into three categories: short-term, medium-term, and long-term. Short-term goals may include buying a car or laptop or travel plans. medium-term may contain children’s higher education and marriage, and long-term goals are mainly retirement plans. People can compromise some of their goals but can’t negotiate on others such as children’s education or marriage. The thing is, take some amount of risk with your negotiable goals, and keep all your non-negotiable goals out of the risk radar.
3. Market Situations:
You must lower down your risk-taking potential while investing in a poor market condition. In contrast, if you are investing while the market is going well you would earn huge profits and enables you to take higher risks. Therefore, build your investment strategies in line with the current condition of the market to avoid losses at least.
4. Online Means
One another way of measuring your risk capacity is going through various questionnaires available online. For example, if you read a question like what would you do if your long-term investment goes down by 50% within a year. If this situation upset you a lot, it means you are averse to risk. Rather, if you accept the situation and continue investing, it’s a clear symbol of a high-risk appetite.
5. Get a financial advisor:
If you are confused about which alternative to choose, a good advisor can help you in choosing the right class of assets that can give you better returns.
