What is Risk ?
Risk means the chance of not meeting the expected returns from an investment.
What is Risk Profiling ?
Risk profiling is a process to know the risk capacity and risk Attitude of an individual or an legal entity. When CRISIL gives rating of any company, its based on its financial and general environment in which it operates. Rating denotes its risk category. Each investment has unique risk to it, and one should first understand, if he or she has risk profile to invest in a particular product.
The process of 'Risk profiling' is most critical step while doing financial planning.Based on it only, you can choose the investment.Its done to assess your Risk Capacity and the level of Risk Attitude and it is important to understand these two components that together determine your individual risk profile. Risk Capacity measures the extent of risk you can afford to take, i.e., how much you could afford to lose without putting the achievement of financial goals at risk. Risk Tolerance measures how you react to the situation when you actually are faced with the risk.Lets understand these concepts-
Risk Capacity : Lets have an example -Gaurav is retired with some savings but no guaranteed income like a pension or fixed deposit interest payments and Dinesh is a middle aged salaried employee with a fairly stable job in a large manufacturing company. It is expected that the Risk Capacity of Gaurav would be much lower than Dinesh as Gaurav has to be more cautious before making any investments that may have the risk of losing money while Dinesh can take some risk as he may believe that in the event that there is some loss or lower than expected return, the monthly salary provides for the regular expenses.
Risk Attitude : Another example- Amit and Suresh are young, salaried and working for the same manufacturing company offering them a stable job. Both invest the same amount in shares of a very good quality company with the objective of holding it for a period of 5 years. One year later, for some reason the entire stock market declines by 10 percent and the value of the shares that they had invested falls 10 percent below the cost of purchase. The company is still a very good quality investment. Amit decides that he cannot take any further loss if the value fall more and sells the shares while Suresh believes that this is only temporary, and if he holds on to this investment, there is a very high probability that he will make good returns. The Risk Attitude of Suresh is higher than that of Amit
What Risk Profiling feature in Fundexpert do ?
Our risk profiling feature is a short survey of 10 questions and 5 options each. Based on your source of your income, savings as a percentage of income, dependency, your job scenario risk profiling is done. Then our algorithm create your risk profile, stating where you can invest in ratio. One can always re-enter risk appetite, if things turn around for user.