Before you start investing, the key is to understand your risk profile. Prima facie, you do have a risk capacity but what you need to check is your risk appetite. Risk appetite is more about understanding your actions in times of adverse situation, i.e., how will you react if your investments meant for six years starts showing negative returns after only three months of investing?
So, you are eager, about embarking on an investment strategy. You have decided that you will save money henceforth and invest it smartly to make it grow. You have consulted with your friends and family, have a fair idea on what all options that you plan to take.
Do you know what your risk profile is? Do you know that you cannot blindly invest without knowing how much risk you can take?
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Before investing be clear of your investment objective.
Investment objectives can be broadly classified into:
1.Generating an additional source of income
2. Financing future needs
a. Buying a home
b. Building a retirement corpus
c. Child's education and marriage
d. Legacy Planning
3. Increasing savings/ Inducing savings
4. Reducing tax liability
5. Protecting your savings from inflation
Factors that determined Risk appetite
Loans and Liabilities:
The first and foremost facet to be considered before you embark on investing is to take stock of your loans and liabilities. Loans are simple. You have a track of them, even if you do not realise it! Generally, the EMI payment is deducted from your bank account. Just make a note of them.
Age:
Obviously, the younger you are, the higher risk you can take (it includes those who are young at heart as well!). By age, what we are trying to say is, that when the age is lower, the investments have a longer time to reap rewards.
Income:
Your income and its steadiness is another major factor which contributes to your risk profile. Are you in a good job which pays you enough to cover all your essential needs with ease? In case a couple of investments take a longer time to reap returns, will your day-today living take a hit?
Current Scenario :
Your age, financial dependents, assets and liabilities, sources of income, level of engagement (active or passive investor) and investible capital
Past Experience:
Knowledge about investment products, inclination to learn, nature and composition of the last held portfolio and its performance
Future Outlook : Time horizon available to fulfill the investment objectives, liquidity requirements in the near future, importance of tax savings vis-a-vis return on investment
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