There is an investment route for every type of appetite; not investing is a risk in itself, so assess and act.
For 26 year old marketing executive Sheetal Patel, investment was a vague concept. Some of her office colleagues used to brag about investing in the share market and their hyper mood swings were like an intense amusement park ride, going up and down multiple times during what she later learnt was a single trading session. The calm and composed receptionist used to dole out homespun advice about buying gold or silver and parking savings in fixed deposits along with band aids and paracetamol.
Her immediate senior advocated mutual funds as the ultimate investment vehicle and she almost jumped onto the bandwagon until a kindly acquaintance pointed out that she knew next to nothing about them and how they operate or how they are monitored. The question that she and so many others are trying to answer is ‘what investment avenue should I opt for?’ The answer depends on a number of factors, chief among which is risk appetite, which like food varies from individual to individual.
Risk profiling measures the balance between risk and return that you are ready to accept. As the experts at Skandia point out, all investments involve some risk. On knowing the extent to which you can tolerate a potential short-term loss while pursuing a long-term gain, you can begin to build your investment portfolio. The more accurate your profile, the greater the chance of achieving the most suitable investment mix for your needs.
The three basic risk profiles are ‘cautious’, ‘balanced’ or ‘aggressive’. However there are now many sophisticated risk profile questionnaires and online tools available used by professional financial advisers to help measure your appetite for risk more precisely, with investment strategies designed to match the outcome. Ask yourself these questions to get started.
How many years can you let money grow before you need to start making significant withdrawals?
Are you well settled in your job/ profession/ business? How far away are you from retirement?
What assets have you set aside beyond your investment portfolio for emergencies?
Do you plan to add regularly to your investment portfolio, or take out more than you put in?
Do you foresee any major expenses (higher studies, marriage, medical) over the next 5-10 years?
Would you be depending on income from your investment portfolio for normal living expenses?
An investment shows 25% loss in a year due to market sentiment; will you sell all/ part of it or hold on?
Would you react adversely to up and down movements in your portfolio value or remain calm?
Now look at the answers and you should have a fair idea about where you stand in terms of your attitude towards risk and capacity for it.
Expert Speak
Japjit Singh Bedi, Head-Deposit and Wealth Management, Private & Business Clients, Deutsche Bank India, opines that risk-averse customers may consider MIP or Dynamic Bond funds. Systematic Investment Plan (SIP) is a good solution, i. e. savings and investing into an efficient product, with another important benefit of rupee cost averaging. Review the performance atleast once a year to take any mid-course corrective actions such as rebalancing to avoid under/ over allocation, any tactical call on market or replacing any non-performing scheme. Consider personal preferences, risk appetite, experience with different products, goals and priorities before finalising any investment.
Perspectives
Kamlesh Gandhi, a 45-year old businessman in the electronics field, feels that age is a key factor when it comes to shaping attitudes towards risk. “Till 45 years people are ready to take on greater risk. Once your child reaches the age where higher education, marriage, etc are close by, you start trying to strike a balance between risk and returns, with a gradual emphasis on safety. After 55-60 years you just want safety and become totally risk averse. I have invested in insurance, fixed deposits. I invest in gold and silver when the price is within reach. and have invested in the equity market as well. Whenever I feel share market activity is low, I switch to liquid funds as they give better returns than fixed deposits. My observation is that due to the uncertainty in business policies, the next generation of the business community is becoming self employed professionals or going for jobs. Due to this, a lot of businesses are shutting down and their capital is getting invested in various avenues,” Kamlesh points out.
Vijay Sonigra, age 40, has twin incomes, a salary for being the weight lifting coach at IIT and the turnover from his apparel creating business. His attitude towards risk can be summed up in three little words – play it safe. “It is okay if benefits are less or returns not too high but the amount invested should be secure. We mostly invest in bank fixed deposits and life insurance. I am not risk-averse. When finance consultants try to assure that my money will be 100% safe in what they propose, they are always vague. They are not able to inspire confidence in me, so I prefer to take even 6% interest in a bank rather than risk losing what I have saved up with so much effort over so many years,” he emphasises.
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