Risk Profiling for Long Term Investors“An investment in knowledge pays the best interest.” – Benjamin Franklin
When it comes to investing, nothing will pay off more than educating yourself. Do the necessary research, study and analysis before making any investment decisions. Understanding one’s own risk profile is the first step towards making right investment decision. In this post we’ll share the importance of the risk profiling and how does it affect one’s investment philosophy.
Understanding Risk Profiling: Risk refers to uncertainty which could be favorable or unfavorable. Risk profiling is a process used to find out an investors willingness or risk tolerance to take risk for a possible gain/profit. It helps calculate the average individualistic aversions to all forms of risks that should be taken into consideration in order to enhance the formulation of strategies for the forthcoming future.
Importance of Risk Profiling
- It helps understand the various elements of financial planning.
- It helps ensure righteous investment of asset allocation.
- It determines your individualistic emotional tolerance, perception & financial capacity for risk.
- It also helps comprehend an efficient financial planning with balance & consistency.
- It bridges your financial prospects to reality with a methodical planning.
1. Thorough EvaluationThe primary rule prior any investment is complete evaluation & estimation of the risk-holding capability of the individual / business / organization. Investors broadly show interest in two categories:
- Short Term losses for Long-Term gains
- Low-Return Scheme
- Present: Current financial dependencies, liabilities & assets, source of income and investible capital, etc.
- Past: Expertise knowledge and experience on the subject, individualistic nature, the predisposition to learn & past performances, etc.
- Future: Concerns of tax servings, devotion of time and resources towards potential investment objectives, etc.
2. Clarity about Investment TargetsThis includes variant investment objectives like reduction of tax liability, preventing inflation from your personal savings, financing future needs, etc. It helps you analyze the base intentions behind your investment plans and decisions.
3. Choosing the most accurate Investment SchemesThis could also begin with the most appropriate mutual funds scheme for your company. Something that one would grab the most immediate opportunity that leads you to the road of evolutionary advancement, efficient stability and productive results. Following are the distinct investor objectives in accordance to your personal investible capital management;
- Conservative Investors: The basic aim here is to receive approved & regular income along with righteous preserving of capital. There is a low tolerance of risks resulting in major allocation to money market mutual funds or debt.
- Minutely Aggressive Investors: This follows a moderate amount of risk-taking to maintain balance.
- Aggressive Investors: Here, risk is considered as a contingency and challenge to the plethora of expertise experiences utilized whilst undertaking financial decisions. This results in a major share of the investment into equity & growth schemes.