Capacity of taking risk in investment is the key of successful investor. Many so-called ‘courageous’ investors flee the market in fear of market declines. On the other hand, in the current scenario of high index, the desire to invest more money in the market is also emerging. In both cases there is a complete digestive tract. You need to make sure that your hard earned money is divided into assets that are consistent with your investment goals and personality. This is confirmed by the ‘risk number’.
Ability to Accept Risk in Investment
The Sensex and Nifty crossed the 51,000 and 14,500 levels, respectively. Whenever the index reaches a new high, the desire of many to invest in the market increases. Since I have been associated with banks and mutual funds for many years, I am often asked what is the right time to invest in the stock market. 2000, 2008, 2012, 2015, and the last few months now, this question has been increasing.
The answer to this question may vary from person to person. The reasons I know behind this change are mainly due to the ability of the individual to accept the investment risk and the funds available to him. The investor needs to go through a process of assessing his risk-taking ability.
Risk tolerance is the assessment of how financially an individual is emotionally capable of accepting volatility in an asset. This is a psychological test of how much a person is willing to lose in an investment while trying to get a higher return. A person’s mindset is tested by ‘psychometric testing’ before accepting a job. In the same way, investment advisors use this test to find out how well an investor is able to experience the ups and downs of investing.
Divide the Investment
No two people think exactly the same way. Similarly, when choosing investment instruments, one’s financial behavior largely depends on one’s mentality, past experience, current situation and future financial goals. If you have no doubt in your mind about the risk you are taking when choosing a particular asset class, you will not be distracted by market downturns. There is a correlation between market volatility and risk.
The more volatility in an asset, the higher the return on investment in that asset. If you are unsettled by the instability in that asset class, you will either change the property department or blame the investment advisor, the fund manager. To avoid this, it is very important to divide the assets that identify the risk.
An individual investor’s risk tolerance test involves the current financial status of his / her family members, the investment goals, the time available to achieve the goals, the financial objectives, the current income, the number of financially dependent households, and the monthly income. These and other questions need to be answered. Financial advisors on multiple choice questions create a short questionnaire. In which the prospective traveler is expected to select the appropriate option from the available options.
Investor Risk Tolerance
Two different factors affect your risk. First, there are questions about how your risk tolerance can affect your future investment behavior, along with your financial personality traits. So your risk tolerance depends on the answers to the questions in your current life. For example, your risk tolerance is determined by your age, number of dependents, monthly income, and provision of emergency funds. In the first case, there are questions based on imaginary situations and in the second type, there are questions based on reality.
Our risk tolerance depends on these two factors. Approval for interest rate cuts, increase in income tax in the budget, economic reforms that will benefit an industry. You never know what your reaction will be to a market like this and the events that affect your investment. Many so-called patience with the market decline ‘. Investors lose the ability to survive in their equity investments Or the desire to invest more money in the market at a high index like the current one Or the division of assets according to risk to achieve emotional control helps to achieve financial goals.
Your risk number ensures that your asset segmentation (high risk ‘and’ low risk ‘) is consistent with your financial personality. Your hard earned money will be divided into assets consistent with your investment goals and personality. In the event of a market downturn, both selling with fear and investing in greed can be avoided.
Note: For this, SEBI has made it mandatory for the mutual fund to highlight the investment-related risks on the promissory note. The semicircle, divided into six segments, represents six types of risk tolerance. We need to reconcile our risk tolerance and the risk of fungus.
Conclusion
Your risk may vary depending on the circumstances. Changing jobs, increasing or decreasing the number of dependents, and the death of a spouse all affect your risk tolerance. Risks need to be reviewed if there is a change in financial or family circumstances.
With all of the above in mind, it is possible for an investor to achieve his financial goals if he plans his finances. ‘Time in the market’ is more important in the current market situation to achieve investment objectives than ‘seeing the market’.
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