Now, here are a few factors that can help you determine your risk tolerance:
Income: This is the biggest factor to establish your risk tolerance. If your income is good, you won’t hesitate to invest in various schemes as a little financial setback won’t affect you.
Expenses: Even with a good income, if your expenses are high, you might end up saving very little. As a result, there is doubt and fear taking an investment decision. This implies a lower risk tolerance. It is important to trim expenses in order to keep your financial health intact.
Financial goals: If you are burdened with short-term goals for which finances aren’t planned, then you will not be able to invest much, as most part of the earning is spent on such goals. In such a case, the risk tolerance is said to be lower than a scenario where you have your goals planned and there is no hesitation in investing. With long-term goals, you can expose yourself to high-risk investments.
Hard cash: If you have enough liquid cash in your account to support you for a year or two, it would be alright to make high-risk investments.
Insurance cover: Be it any form of insurance, if you are sufficiently covered, then you are more willing to take an investment risk. For example, if you have sufficient fire insurance, you can risk investing excess funds. Similarly, in the case of health insurance, if you do not have sufficient cover, sudden medical emergencies or accidents could burn a hole in your savings and prove to be a heavy liability. If you are well-covered and can handle medical expenses, then this results in increased risk tolerance.
In order to make a wise decision about investments, you should be able to determine your risk appetite and risk tolerance.
The writer is CEO of BankBazaar.com