This story is from April 15, 2008

Know your appetite for risk-taking

Debojyoti Ghosh / TNN / Apr 15, 2008, 01:14 IST

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The key for any investor is to identify his/her risk-taking capacity and the return objectives. A certain amount of risk is an inherent part of the investment process.

One of the most important things to do before you make your investment allocations is to understand your risk profile. How much risk are you prepared to take? Once you have answered that, you are in a better position to understand what investment products to choose.
Many of us tend to be like banking professional Amith Kumar, who has been a regular equity investor for four years.Kumar (28) expects high returns with the least possible risk. But that's something you rarely get in real life. So Kumar often suffers huge disappointments with the performance of his portfolio.
"Selection of wrong funds and an imbalanced asset allocation can have a negative impact on long term goals and objectives," says Anand K S, of Nile Financial Planners.
The key for any investor is to identify his/her risk-taking capacity and the return objectives. A certain amount of risk is an inherent part of the investment process. And invariably, high return products also tend to be the most risky, especially in the short term.

The portfolio must be built keeping in mind investor risk and investment risk. "A balanced portfolio may not give you the best of returns at market peaks, but in the long term it will do well," says Anil Rego, CEO of Right Horizons, a wealth management company.
Risk taking capacity depends on factors like investment objectives, investment time frame, age, income, number of dependents and volume of accumulated wealth. "The cornerstone of risk management is to educate the investor and assess his/her risk profile, using psychometric tests combined with discussions," says T Srikanth Bhagavat, MD of Hexagon Capital Advisors.
The portfolio is constructed based on the amount of volatility that the investor can tolerate for the given time horizon. "Risk is managed using tools such as asset allocation, asset rebalancing, averaging over time (systematic investment plan) for long-term investors," says Bhagavat. For self-assessment there are several tools and questionnaires available online to gauge your risk profile.

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