It may be encouraging to know that you have finally decided to save money and invest it smartly to make it grow. But you should not blindly invest without knowing how much risk you can take. In other words the first step is to decide what mix of investments (Debt- Equity-Gold-Real Estate-Others) you should take depending on your risk taking ability ( Risk Profile). You must consider the following for that:
1. Loans and Liabilities: The first and foremost facet to be considered before you embark on investing is to take stock of your loans and liabilities. Generally, the EMI (loan) payment is deducted from your bank account every month. Any expense or responsibility which requires your contribution monetarily becomes a liability. Apart from loans, these include your monthly expenditure towards the upkeep of your family, school fees and any other similar mandatory outflow of cash from your end.
2. Age: Obviously, the younger you are, the higher risk you can take, the more time you have for your investments to grow & more leeway to correct a wrong investment decision. When you are young & single with fewer responsibilities you can take more risk, once you are married, with kids as responsibility increases, risk taking capability comes down. One easy rule to follow is using 100 –(minus) your age to calculate the equity exposure of your investments and this can keep going down.
3. Income: Your income and its steadiness is another major factor which contributes to your risk profile. Are you in a good job which pays you enough to cover all your essential needs with ease? Other factors like dual income (if you are married & your spouse is also earning) enables you to take a higher risk. If you are a professional or run a business your income may fluctuate from time to time & you need to build up a contingency fund for lean periods.
4. Investment Time Frame and Investing Mindset: It is believed that time mitigates the risk of any investment. The riskiest of investments become profitable when one stays invested for a longer time. As we have seen with equities markets may be volatile over shorter periods but if one stays invested for longer duration of 5-10 years, they always make handsome returns. So, if you are looking at a shorter horizon of investing, say 0-3 years, then obviously, your risk appetite will be lower & you will have to focus more on debt instruments. The longer one is willing to stay invested, the higher the risks that they can afford to take. On one hand, the time frame for investing is important, while on the other the investment mindset of an individual is also of significance. In case, you are willing to stay invested for long but your aim is to protect your capital then automatically, your risk-taking ability is lower. Lastly one can take larger bets in investment avenues like real estate mostly with a long term horizon given the size and procedural time taken.
Sabyasachi Paul has been associated with equity research and advisory on equity markets in India for over 9 years & currently heads the equity research desk of Eastern Financiers Ltd, Kolkata.He also manages a portfolio on the online platform Kristal. Find link to the strategy named ‘The Tortoise’