You must have heard that when you invest, there is always some risk associated with the investment. The stock market is very volatile and this volatility in the market can be referred to as the risk. However, as an investor, you too have thought that losing money in the market is known as risk. If you are not prepared for the market fluctuations, there are high chances that you can lose out money.
Also, if you are trading beyond your capacity, there are high chances that you can probably lose far more than you can bear. Intraday trading allows you to trade using leverages. You can trade for a far more volume than your investment capital. However, in case of loss you can lose far more than you invested.
Therefore, along with investment it is equally important to know about your capacity of bearing risk before you step in the world of investment. Risk profile Analysis helps you analyze your risk bearing capacity so that you can plan your trades accordingly and in case of loss, you never lose beyond your capacity.
As you know that risk has a very hefty bearing on all your investments, therefore, it is very important to have a detailed understanding of the risk which will help you in managing them effectively.
Let us understand why it is recommended to have a Commodity Trading Advisor when you plan to invest in the commodities.
Table of Content
Risk Profile and Its Types
- What is Risk Profiling?
- Types of Risk Profile
- Conservative
- Moderate
- Aggressive
1. What is Risk Profiling?
The quantification of the risk tolerance of any individual can be referred to as risk profile. Every other investor or individual has different tolerance to market risks because risk tolerance depends on various variable factors like age, disposable income, liabilities, assets etc. This is where risk profiling helps. It helps the investor and investment advisor in planning the investments according to the risk bearing capacity so that you never lose beyond your capacity.
There is another term, which is often mixed with risk profiling, which is risk tolerance. Unlike risk profiling, risk tolerance is the willingness of any individual or investor to take risk.
There can be numerous categories in which the risk profile analysis of an individual can fall. Let us now take a look at these types.
2. Types of Risk Profile
The risk profile analysis can be classified into three different categories, broadly. These three categories have further subtypes based on variations in your income, liabilities, age etc. Let us understand about the three main types of risk profile:
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Conservative (Low)
An investor with a conservative or low risk profile status will have a low risk aptitude. Such investors are often more inclined towards the safety of their capital rather than the returns or anything else. People with high liabilities, or individuals who have just begun their financial journey usually fall under this category. With a conservative risk profile, you can typically invest for short horizons.
Some of the investment instruments preferred for conservative investors include sovereign bonds, corporate bonds, treasury bills, debt funds etc.
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Moderate
This is the mid category of risk profile. Such investors usually strive to strike out a balance between risk and return. They are ready to face risk up to an agreeable level for extracting high returns from the market. Such investors prefer to have a diversified portfolio in order to dilute the risk as much as possible. The portfolio may consist of debt instruments along with equities to balance risk and rewards.
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Aggressive (High)
Such investors are those with the highest risk bearing capacity in the markets. They want to extract exponential returns from the market and are ready to withstand all the market volatilities for the same. These investors are experienced and well conversant. These investors have a long investment horizon.
Equities are the preferred choice of such investors due to the high reward nature and have a healthy asset-liability balance. New investors with adequate capital at disposal can also fall under this investment risk profile.
Conclusion
Risk profile is very important before you plan any investment. Any risk beyond your risk bearing capacity can severely hamper your financial balance and even led to huge debts. Analyzing your risk profile is not a tedious job and can be finished off in a few minutes. You can get your FREE risk profile analysis by simply answering the questionnaire of your investment advisor. Advanced algorithms analyze your answers to provide your risk being capacity.
