What is Risk Profile?
A risk profile refers to an individual investor’s ability and willingness to take any risks with their investments.
Risk Profile Questionnaire is a framework designed to evaluate the investor’s experience and sensitivity to losses both at the time of market decline and subsequent periods. Getting an accurate risk profile for an investor is critical as it will dictate the investor’s risk rating and ultimately the investment strategy pursued to achieve their financial goals.
How is Risk Profile assessed?
The questionnaire provides a basis for an in-depth conversation about the investor's knowledge, background, and provokes discussion about reasonable investment objectives.
Typically, while deciding on where to invest, investors are not very specific about their objective - for example, when discussing their objectives, many investors want to get high returns, but they expect the investments to be safe and liquid as well. For solving this practical problem, the questionnaire-based methodology helps to calculate the objective with the appropriate risk profile.
Our Risk Questionnaire comprises of :
- Investor’s age
- Investor’s income details
- Liability and borrowing details
- Existing Investments/Assets
- Risk Appetite: This will comprise of an investors willingness and ability to take risk that includes client’s capacity for absorbing loss so as to arrive at a score for Risk appetite/ Risk tolerance.
- Time horizon
Here's a glimpse of our Risk Profile questionnaire:
- How much loan/liabilities do you have?
- Select the investments you currently own?
- Your DOB
- What is your yearly income?
- You have Rs.10 lakh to invest at the start of the year. Below are the three hypothetical investment portfolio returns scenarios with likely best and worst-case annual returns. Which scenario would you prefer?
- Time horizon
Based on the responses selected by the Investor, investor is assigned one of the following categories:
Conservative
Conservative investors have a priority of capital protection and would usually have a shorter term horizon (Less than 18 months). These investors usually have low understanding of investment matters and do not want to take risk with their capital.Moderately Conservative
Moderately Conservative investors are mostly looking for a stable & safe income with some appreciation in capital. These investors generally have a short term to mid term investment horizon and need capital appreciation to protect against inflation with minimum risk.Balanced
Balanced investors prefer a balance between capital growth and at the same time capital security. These type of investors have moderate knowledge of investment products. These types of investors seek optimum balance between income and growth with a medium to slightly higher time horizon for investments to perform.Moderately Aggressive
Moderately aggressive investors normally have moderate to high knowledge of investment matters. They have experience of investing and have a long term time horizon i.e 5-7 years. They are willing to take investment risk and understand that the same is critical to generate long-term return. However they do not wish to make unbalanced investment decisions. These investors are happy to take calculated risk to achieve the desired rate of returns but utilize available hedges against the downfall to protect the capital from downside.Aggressive
Aggressive investors are experienced investors with high knowledge and understanding of investment matters. These investors have a strong bias towards investments with high growth potential due to their experience with investing. They are willing to accept higher performance fluctuation in return for potentially higher long term capital growth. Long term horizon of 7+ years is one of the key markers of this profile.
