Sign up for Equitymaster's free daily newsletter, The 5 Minute WrapUp and get access to our latest Multibagger guide (2017 Edition) on picking money-making stocks.

This is an entirely free service. No payments are to be made.

Download Now Subscribe to our free daily e-letter, The 5 Minute WrapUp and get this complimentary report.
We hate spam as much as you do. Check out our Privacy Policy and Terms Of Use.
Investing: What's your risk tolerance? - Views on News from Equitymaster
  • E-MAIL
  • A  A  A
  • Sep 15, 2005

    Investing: What's your risk tolerance?

    From the Finance Minister and the SEBI to the local broker, all governing bodies, intermediaries, participants and advisors are leaving no stone unturned to display their levels of comfort with the current market valuations. No one, however, seems to be bothered about the fact that 'level of comfort' is not a universally common phenomenon, but varies from individual to individual depending upon his/her risk profile.

    In fact, the risk profile of a retail investor is distinct from that of high networth individuals or institutional ones. It is thus pertinent for an investor to judge his/her positioning on the risk return matrix before going ahead with the asset allocation.

    Risk-reward concept
    You might be familiar with the risk-reward concept, which states that the higher the risk of a particular investment, the higher the possible return. This is a general concept underlying anything from which a return can be expected. Anytime you invest money into an asset (here meaning investment) there is a risk, whether large or small, that you might lose money or not get anything back. In turn, you expect a return, which compensates you for bearing this risk. In theory, the higher the risk, the more you should receive for holding the investment, and the lower the risk, the lesser are your dues.

    Determining your risk profile
    With the varied investment avenues available to choose from, how does an investor determine how much risk he or she can handle? Every individual is different, and it is difficult to create a steadfast model applicable to everyone. However, one should consider the following aspects to determine the individual's risk profile.

    • Demographic profile: Age, stability of income and access to varied investment avenues (depending on literacy and place of residence) are some of the demographic segmentations that one should evaluate. Higher age, lower stability of income and lesser access to investment avenues (and related information) put an individual in a profile, which calls for investment in 'low-risk' assets.

    • Liquidity: Liquidity requirement or, in other words, longevity of the investment is another critical parameter to be looked into. Investors requiring higher liquidity are better off staying away from high-risk investment. 'Stocks are a safe bet, but only if you stay invested long enough to ride out the corrections,' said Peter Lynch. Thus, investors looking at short-term avenues need to categorise themselves in the profile which calls for investment in 'low risk' assets.

    • Rate of return expected: Equity investments are suitable only for those investors who are ready to take higher risk thus expecting returns more than what is provided by low-risk assets like debt and fixed deposits.

    Investment risk pyramid
    After deciding on how much risk is acceptable in your portfolio by acknowledging the above parameters, you can use the risk pyramid approach for balancing your asset allocation. This pyramid could be used as an asset allocation tool with the help of which investors can diversify their portfolio of investments according to the risk profile of each security. The pyramid, representing the investor's portfolio, has three distinct tiers:

    • Base of the Pyramid: This area comprises of investments that are low in risk and have foreseeable returns. It should desirably compose the bulk of your assets if you are a risk-averse investor.

    • Middle Portion: This area is made up of medium-risk investments that offer a stable return while still allowing for capital appreciation. As they are more risky than the assets creating the base, these investments suit investors having slightly higher risk tolerance.

    • Peak: Reserved specifically for high-risk investments, this should ideally comprise the smallest proportion of an investor's portfolio and should be fairly disposable so that the investor does not have to offload it prematurely in instances where there are capital losses.

    Check whether the returns expected match your risk-taking capability! We believe that investors would be well off if they correctly determine their 'risk tolerance' before making their allocations.



    Equitymaster requests your view! Post a comment on "Investing: What's your risk tolerance?". Click here!


    More Views on News

    How to Ride Alongside India's Best Fund Managers (The 5 Minute Wrapup)

    Jun 10, 2017

    Forty Indian investing gurus, as worthy of imitation as the legendary Peter Lynch, can help you get rich in the stock market.

    Why Hasn't Warren Buffett Rung the Bell Yet? (The 5 Minute Wrapup)

    Aug 22, 2017

    It's surprising Warren Buffett hasn't warned investors about the expensive stock market? Let us know why.

    Think Twice Before You Keep Money In A Savings Bank Account (Outside View)

    Aug 22, 2017

    Post demonetisation, a cut in bank savings deposits rates was in the offing.

    A Darkness Is Spreading Across the US (Vivek Kaul's Diary)

    Aug 22, 2017

    Today, we are attacked by one preposterous thing after another, each of them even more absurd than the last.

    Dear PM Modi, India is Already Land of Self-Employed, and It Ain't Working (Vivek Kaul's Diary)

    Aug 21, 2017

    Most Indians who cannot find jobs, look at becoming self-employed.

    More Views on News

    Most Popular

    A 'Backdoor' to Multibaggers: It's Like Investing in Asian Paints Ten Years Ago(The 5 Minute Wrapup)

    Aug 10, 2017

    Don't miss these proxy bets on growing companies or in a few years you will be looking back with regret.

    The Most Important Innovation in Finance Since Gold Coins(Vivek Kaul's Diary)

    Aug 10, 2017

    Bill connects the dots...between money and growth, real money and real resources, gold and cryptocurrencies...and between gold, cryptocurrencies, and time.

    Signs of Life in the India VIX(Daily Profit Hunter)

    Aug 12, 2017

    The India VIX is up 36% in the last week. Fear has gone up but is still low by historical standards.

    Bitcoin Continues Stellar Rise(Chart Of The Day)

    Aug 10, 2017

    Bitcoin hits an all-time high, is there more upside left?

    5 Steps To Become Financially Independent(Outside View)

    Aug 16, 2017

    Ensure your financial Independence, and pledge to start the journey towards financial freedom today!

    Copyright © Equitymaster Agora Research Private Limited. All rights reserved.
    Any act of copying, reproducing or distributing this newsletter whether wholly or in part, for any purpose without the permission of Equitymaster is strictly prohibited and shall be deemed to be copyright infringement.

    LEGAL DISCLAIMER: Equitymaster Agora Research Private Limited (hereinafter referred as 'Equitymaster') is an independent equity research Company. Equitymaster is not an Investment Adviser. Information herein should be regarded as a resource only and should be used at one's own risk. This is not an offer to sell or solicitation to buy any securities and Equitymaster will not be liable for any losses incurred or investment(s) made or decisions taken/or not taken based on the information provided herein. Information contained herein does not constitute investment advice or a personal recommendation or take into account the particular investment objectives, financial situations, or needs of individual subscribers. Before acting on any recommendation, subscribers should consider whether it is suitable for their particular circumstances and, if necessary, seek an independent professional advice. This is not directed for access or use by anyone in a country, especially, USA or Canada, where such use or access is unlawful or which may subject Equitymaster or its affiliates to any registration or licensing requirement. All content and information is provided on an 'As Is' basis by Equitymaster. Information herein is believed to be reliable but Equitymaster does not warrant its completeness or accuracy and expressly disclaims all warranties and conditions of any kind, whether express or implied. Equitymaster may hold shares in the company/ies discussed herein. As a condition to accessing Equitymaster content and website, you agree to our Terms and Conditions of Use, available here. The performance data quoted represents past performance and does not guarantee future results.

    SEBI (Research Analysts) Regulations 2014, Registration No. INH000000537.

    Equitymaster Agora Research Private Limited. 103, Regent Chambers, Above Status Restaurant, Nariman Point, Mumbai - 400 021. India.
    Telephone: +91-22-61434055. Fax: +91-22-22028550. Email: info@equitymaster.com. Website: www.equitymaster.com. CIN:U74999MH2007PTC175407

    Become A Smarter Investor In
    Just 5 Minutes

    Multibagger Stocks Guide 2017
    Get our special report, Multibagger Stocks Guide (2017 Edition) Now!
    We will never sell or rent your email id.
    Please read our Terms


    Aug 22, 2017 03:36 PM