Investing in stocks and equities are riskier than investing in a bank FD. An investor's risk appetite denotes the magnitude of risk he/she can take based on the goals and expected returns.
Investments are subject to risk. There is risk attached with any kind of investment. The risk appetite of a person determines, how much risk can one take while making investments. Investing in stocks and equities are riskier than investing in a bank FD. An investor’s risk appetite denotes the magnitude of risk he/she can take based on the goals and expected returns.
For instance, in a worst-case scenario, your returns from your investments might not turn out as expected, and you could lose some or all of your investment. For such a downturn, an investor needs to have a high-risk appetite.
Some factors to consider when determining risk appetite include the investor’s age, financial goals, investment horizon, current and expected future income, and net worth and insurance cover.
Classification of investments based on the level of risk:
High Risk – Equities and cryptocurrencies
Moderate risk – Mix of debt and equity
Low-risk – Fixed deposits, saving schemes along with few debt securities.
Here is how you can evaluate your risk appetite;
Investable surplus – Industry experts say, investable surplus plays a critical role in shaping ones risk-taking potential. For instance, if you have an investible surplus of say Rs 20 lakhs, a loss of Rs 20,000-30,000 might not affect your financial health and goals much due to the vagaries of the market. However, losing the same amount of money from a surplus of Rs 2 lakhs may affect the investor’s goals and finances.
Experts say, investors can adopt an aggressive approach but only with a higher surplus and vice-versa.
Financial goals – Financial goals are time-bound and are usually classified into 3 terms – short-term, mid-term and long-term. Going on a vacation, buying a car, etc. falls under the category of short-term goals, whereas, higher education of children and their marriage falls under the category of mid-term loans. Long-term goals consist of retirement, etc.
While some goals are negotiable, but not all. For example, going on a vacation or purchasing a car can be pushed for some years, but the higher education of your children cannot be compromised or delayed.
Stock markets – The stock market contributes to different experiences for every investor. People understand it at a different pace. For instance, one could have made investments at a time when the market was firing up, thus enhancing their gains, and resulting in high-risk appetite.
At the same time, there can be situations when one might have entered the market during a rough patch, resulting in losses, and toning down the investor’s risk-taking potential.
Hence, experts say subsequently investment strategies drives one’s thinking process and risk-taking appetite.