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Last Updated : Dec 07, 2019 11:45 AM IST | Source: Moneycontrol.com

How to evaluate your risk appetite?

Risk appetite denotes the magnitude of risk an investor can stomach based on his goals and expected returns. But justifying your risk can often leave you confused.

Moneycontrol Contributor @moneycontrolcom

Rahul Jain

When we start our investment journey, along with the anticipation of returns one of the first things we evaluate is the risk appetite. Risk appetite denotes the magnitude of risk an investor can stomach based on his goals and expected returns. But justifying your risk can often leave you confused.

I believe the easiest way to come to a solution is to ask the right. Hence I list down some essential questions answering which will help you analyse this essential investment metric and this article will help you dig deep into them. Let’s get started.

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How vital is your investable surplus?

This is the first question that you need to answer while gauging your risk appetite. The value of money or rather an investable surplus plays a critical role in shaping your risk-taking potential. If you have an investible surplus of say Rs 2 crore, a loss of Rs 1-2 lakh due to vagaries of the market may not affect your financial health and goals much.

On the other hand, losing this money from a surplus of Rs 5 lakh may derail your finances and force you to compromise on your life goals. Thus, the worth of money goes a long way in the development of risk appetite. You can adopt an aggressive approach with a higher surplus and vice-versa.

Financial goals – and the way forward

Financial goals are time-bound objectives, which are generally classified into three buckets – short-term, medium-term and long-term. While short-term goals may entail going on a vacation, buying a car, objectives such as higher education of children and their marriage fall under the category of medium-term.

On the other hand, retirement is a long-term goal. However, it’s important to note that not all goals are negotiable. For example, you cannot compromise or delay higher education of your children. On the other hand, going on a vacation or purchasing a car can wait for some years.

On most occasions, you would not like to take unwanted risks with your non-negotiable goals. For negotiable goals, you can take some amount of risk and make high-risk financial investments.

Maturity in stock markets

Everyone evolves in the stock market at a different pace and this thereon contributes to different experiences for each individual. For instance, you may have made a capital investment at a time when the market was firing all cylinders, thus enhancing your gains. This may build up higher risk appetite.

At the same time, there can be situations when you might have entered the market when it was going through a rough patch, resulting in losses. This experience can lead to toning down your risk-taking potential. To put it in other words, the level of comfort with markets drives your thinking process and subsequently investment strategies.

The Takeaway

Every investor is unique in term of cash flow and liabilities. This uniqueness makes risk-tolerance levels distinct for each one of us. However, to achieve financial freedom, it’s crucial to have a fair estimate of your risk appetite. In case, you find it difficult, you can consult a certified financial planner.

 

The author is Head - Personal Wealth Advisory at Edelweiss

Disclaimer: The views and investment tips expressed by investment expert on moneycontrol.com are his own and not that of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.
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First Published on Dec 7, 2019 11:45 am
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