We often hear that people should invest in assets depending upon their risk taking ability. But the million dollar question is what is ones risk taking ability?
We often hear that people should invest in assets depending upon their risk taking ability. But the million dollar question is what is ones risk taking ability? Can a questionnaire alone decide how much risk one can take ? If so will it remain the same till one meets his goals?
The answer is indeed very tricky. This is so because our risk taking ability is decided by many external factors. For example when the markets perform well even risk averse investors start investing in the markets and when markets don't do well our portfolio tends to get skewed towards debt. Our risk taking ability also depends on factors like peer pressure, our past experience, our family background etc.
Risk taking ability should purely depend upon your milestones and your current financial condition. If the goals are Short term in nature then it is better to invest in fixed income bearing securities though other riskier options could look exciting. Similarly when the goals are long term in nature a certain amount of risk could be taken in order to improve our return on investments. The problem is that more often than not people lose focus of their goals and start investing looking at the product features and immediate gains. In such conditions your ability to take risks changes drastically. When this happens and the investments don't yield the desired result then the entire planning falls flat.
So what should ideally decide your risk taking ability is the importance and seriousness of your milestones for which that particular investment is to be done. Once this is clear an assessment of one�s risk taking ability could be easier and investments could be more focused and streamlined.
Mukund Seshadri is the senior partner at MSVentures Financial Planners.