Foodies would agree with me that they know the power of ingredients , then the power of mixing it in the right proportion , and what comes out on your plate is something you like having it again and again . That’s a recipe success isn’t it .
Do you know that Investment decisions follow the same process , we need the right recipe , the right ingredients and to make it taste great ” Secret Ingredient” , the right equipments and the outcome is something which we like to look back and say that the outcome is as per expectations or even better .
Now what if you forget one key secret ingredient , in investment parlance the end result is not known immediately it is known at sometime in future , this makes it much more than keeping things simple , and thats the truth , we cannot make everything look simple lets accept it that if the cost of keeping the process simple and missing an ingredient is a sure recipe for a disaster , which is wealth destruction .
We asked this question to many investors. And the answers we got were mainly one of the below:
- Horizon of investment
- Purpose of investment.
Now, this seems logical enough right? So what are we missing?
Where does risk profile play part in this? And if we have clarity on the above two factors, is the risk profile even necessary?
Well, we are sure this question is there on every investor’s mind. And therefore we are going to address this dilemma with some example.
Lets meet Rohan, young investor with a long horizon for investment.
Rohan invests all his money in stocks and equity mutual funds. He also has a valid reason for it : long investment horizon.
As the markets were in upward trajectory, Rohan was immensely satisfied with his decision of going aggressive into equity. But, then markets started correcting, and Rohan’s euphoria turned into panic. Even though, his investent horizon was long term, some fall in the value made him feel uncomfortable. His next steps were to remove the money impulsively and putting in bank FDs.
This type of a behavior is very normal for any investor. But can this be avoided?
Now we have with us Sangeeta, working mother with childern’s education goal coming up in 7-8 years.
Even though the education goal is 7-8 years away, Sangeeta invested the amount in conservative funds with a fear of not completing the education goals. But with this conservative investments, she couldn’t beat the inflation and ended up underfunding the education goals. What would have helped her to efficiently invest her capital to complete her goals?
What if we tell you that the answer to both questions is Risk Profiling? Yes, that’s right.
So what exactly is Risk Profile?
Every person has a unique personality based on many factors. In the same way, every person has a unique financial behavior based on his or her personality. And this financial behavior can be understood with the help of risk profiling exercise. Defining asset allocation with the help of risk profiling sets the expectations and then the impulsive decision making can be avoided.
Even though, the horizon and purpose of investment are very important factors while taking decisions of investments, if married with risk profile, expectations can be met with reality.
Going back to our examples, if Rohan would have invested according to risk profile, he wouldn’t have invested all his money in equity hence would have been succesfully avoided the decision he took in panic. Similary, Sangeeta, could have balanced her investments with the help of risk profiling to beat the inflation and complete the goals.
So, what are you waiting for? Get your risk profile done .