Risk Profiling in Mutual Funds

Whether you lean towards equity, debt or hybrid investments, recognising your risk tolerance is paramount. By conducting a risk profile assessment, you gain foresight into potential investment risks, mitigating any future unease before it arises. Rakesh Deshmukh takes a closer look at the scenario to see how it works

- Rakesh Deshmukh

Imagine you are at a bustling wedding, the air thick with celebration. The groom’s family is known for its love of gold, adorning themselves in heavy necklaces and shimmering bangles. The bride’s side, however, prefers the elegance of diamonds, a symbol of timeless value. Just like jewellery preferences, risk tolerance varies greatly among investors. What excites one person might terrify another. This is where risk profiling steps in, acting as your personal financial matchmaker for mutual funds in this dynamic market with so many options.

Everyone sees risk differently, so it is important for everyone to understand how much risk you are okay with. Risk profilers do this to ensure you don’t invest in a fund that is too risky for you and does not match your risk appetite. Figuring out your risk appetite means looking at how much risk you need to take to reach your goals, how much you can handle it financially, and how comfortable you are with taking such risks. When visiting an AMC’s website to search for mutual funds for analysis or for investments, the website is likely to ask for some basic details such as your age, risk tolerance to volatility, risk appetite, years of experience in the market, investment goals and financial situation, whether you are a student or a salaried person and so on.

This process helps determine your investment personality. Nowadays, various algorithms are implemented which utilise such questionnaires to assist in selecting better funds based on the inputs provided through the above steps. You may be okay with taking higher risks when you want to aim for bigger returns to reach your financial goals. Also, whether you can handle risks or not depends on factors like how much money you make, the number of dependents, and how long you plan to remain invested i.e. your investment horizon.

Unveiling Your Risk Persona