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DECODE WHAT TYPE OF INVESTOR YOU ARE

Low risk and high returns are the main considerations when it comes to financial investments. For people who are looking to invest, the range of investment opportunities available can be overwhelming because while you can pick and choose from a wide variety of investment options, the majority are not well-informed about all the options available. To make matters more complex, the risks associated with the more aggressive investment options means that the category of investors with limited finances at their disposal will often shy away from  exploring them.

Before you actually start investing, it is a smart move to first identify what type of investor profile you have. Once you understand your risk profile, you can determine your investment capacity accordingly.

 

SECURE INVESTOR

For a conservative investor, patience and financial security are the deciding factors. They tend to take the safe route when it comes to investments and would prefer to invest in traditional investment tools like Fixed Deposits, National Savings Certificates, provident funds and government-associated Life Insurance Policies (Example – Life Insurance Corporation of India) where there are no market risks involved and the returns on investments are assured. Their faith in traditional investments is so substantial that they are fine with overlooking the slow rate of growth on their invested capital.

 

CONSERVATIVE INVESTOR

Conservative investors are aware of the security and assured returns of traditional investment tools but tend to be inquisitive about the profitability and ROI potential that options like mutual funds and National Capital Debentures hold. They are likely to invest a large part of their capital in traditional investment instruments like FDs, NSCs while putting a small portion of the capital in low-risk options like bonds.

 

MODERATE INVESTOR

Moderate investors have fair knowledge of the riskier investment options but will invest in a very balanced proportion. While they would allocate a good chunk of their total capital to traditional investors, they will also invest in options like debt-oriented mutual funds and balanced funds (60% equity and 40% debt) to get a moderate level of growth on their invested capital.

GROWTH INVESTOR

Growth investors will have extensive knowledge of how different investment options work and have a moderate to high risk appetite. They invest with the long-term objective of getting consistently high growth on their investments. They very well recognize that building a good financial portfolio is about diversification and having a risk-return ratio that is in line with their risk appetite.

Investors of such a profile pick options like equity-based mutual funds, RGESS, SIPs etc. along with a small portion in traditional options.

AGGRESSIVE INVESTOR

The profile name says it all. Aggressive investors believe in investing capital in a single asset, majorly equity. Moreover, they can also focus on a particular sector (e.g. FMCG or Real estate) which is showing high growth. Their investment approach is based on the in-depth knowledge of the financial asset they are investing in and are very well aware about the high amount of risk these investments carry.

This expertise is gained through years of market research and thorough understanding of the selected investment instrument and sector. The most important aspect of this profile is that an aggressive investor will always have a contingency plan to safeguard his investments.

 

Determining your risk profile

It is important to recognize which investor profile you come under before you start investing. Different individuals have differing views towards the amount of risk they are willing to take.

Now although there is no definite approach to knowing what your risk taking capacity is, you can determine it from a logical stand point based on the following parameters –

1)      Current Age and years of employment – At a younger age, you can think of allocating a higher portion for options like equity which have higher risk but the possibility of high growth as well. But as you grow older, your preference will be going for low risk investments.

 

There is a general thumb rule of the “100 minus your age”, where you subtract your age from 100 and the result you get is the percentage of your portfolio that you should allocate to stocks. While this may work for some, it is important to note that this is not the tried and tested way of allocation.

 

2)      Current earning and expected future earning – The money you can invest every month comes from your monthly income minus the expenses. At that time, the amount you decide to invest would be what you can invest after keeping a part of it for financial emergencies.

 

At the same time, having a prospective view on how you can exponentially increase the amount of investment in proportion to the growth in your income will be helpful.

 

3)      Current liabilities and expected future liabilities – This is a major part of your monthly and annual expenses with the loans, education fee and other liabilities that you may have at the moment. Here, you would also like to take into consideration how your liabilities may increase (e.g. better standard or living or buying home) in the future before making major investment decisions.

 

 

4)      Objective of investment and Investment Timeframe – These two factors go hand in hand. If you invest for a shorter timeframe of say 4-5 years, your objective might be to buy a new car or fund your child’s education. An investment of 8-10 years or more can be towards objectives like buying property or retirement planning.

 

Your investments must be in line with your investment objectives and risk profile. This becomes very important so that  you are able to achieve the anticipated growth from your investments and at the same time, your portfolio can withstand losses to some degree in the event they should occur.

 

5)      Understanding of investment options – This is an integral part of how your investment portfolio will take shape. Someone who has limited knowledge of the available options is likely to go for options which are considered by the majority of those who invest. On the other hand, those who have studied and analyzed the historical and current performance of investment options are likely to have a higher risk tolerance and will aim at having more diversified portfolio aimed at growth.

Apart from these factors, you can also use online risk profile calculators like Calcxml, Moneycontrol Asset Allocation Calculator and Asset Analysis to understand which investor profile you fall under.

In essence, it is the combination of these key parameters that can help you understand what risk is when it comes to investment and also help you determine your risk profile. Once you have clarity on that, you can devise an investment strategy based on your investment objective and select your options accordingly.

 

 

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