One of the first principles of investing is to ensure your investments are aligned to your risk appetite. Each one of us has our own risk appetite – how much risk are we willing to take to get higher returns on our investments. In simple terms, risk appetite is our ability to tolerate losses in expectations of higher return.
Investment choices are available to all types of investors with varied degrees of risk-taking capacity. Those with a low-risk appetite should look to invest in Bank FDs, Money Market Funds or Debt Funds – where risk is low, but returns would also be lesser than say, Equity Mutual Funds. Do note that low risk doesn’t mean risk is zero.
Equity Mutual Funds are suited for investors who have a higher capacity to take risks. Within Equity Funds too, specific categories of funds like Small Cap Funds, Thematic Funds etc. are at a higher end of risk, whereas Index Funds, Hybrid Funds, Bond Funds etc. carry relatively lesser risk, especially if one stays invested for a longer period of 5+ years.
Risk appetite varies with each individual. For the same goal, say retirement, choices which a 35-year-old chooses should be different from what a 55-year-old invests in. A younger investor might want to have a high proportion of his savings channeled into high-risk schemes – like Equity Mutual Funds. An investor close to retirement, on the other hand, should prefer low-risk investments – like Debt Funds. Two individuals of the same age may also have completely different risk appetites, depending upon their lifestyle, financial outlook, saving and income, along with other factors which are personal to them.
Hence, it is important one understands their risk appetite before one makes a choice of funds.
In our Investment Advisory journey, we have built a set of questions for our consumers at the beginning of the journey. Through your responses, we would be able to assess your risk profile. You can find our assessment of your risk profile under the section “Investment Profile”.