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Sunday, April 3, 2016

Risk Profiling before making Investments

  FACTORS THAT AFFECT YOUR ABILITY TO TAKE RISK
 
AGE

Age is the most important factor of your risk profile. The younger you are, the higher the capacity to stomach risk. In a downturn, a young person can wait till the investment bounces back. Some planners say that equity allocation should be 100 minus your age. But just because a person is 25 years old doesn't mean he can invest 75% in stocks. Other factors also play a role.

INCOME

Lumpy income impacts the risk profile. Self-employed professionals such as lawyers, architects and consultants don't get paid on a monthly basis. They need bigger buffers of liquid investments to meet emergencies. A salaried individual has a regular stream of income and can opt for instruments that have short-term risks but give higher returns in the long term.

LIABILITIES

If you have a home loan or other liabilities, avoid big risks with your investments. Ideally, a person's debt repayments should not be more than 50% of his income. The rise in interest rates would impact the finances of someone with a long-term home loan. On the other hand, if you are not repaying any loan, you are in a better position to invest in riskier assets.

DEPENDANTS

The dependency level of a person also affects his risk tolerance. If he is the sole breadwinner of an extended family (parents, siblings, spouse, children), an individual should not take high risks. On the other hand, someone with a working spouse and no dependents can afford to.People with many dependents also need more insurance and build a larger emergency fund.

FIELD OF WORK

The industry in which a person works determines the stability of the income. Someone working in a tech start-up should not be as aggressive an investor as someone working in an FMCG company. Similarly, a higher quantum of debt investment is also recommended for a self-employed professional, who ploughs back a big chunk of his earnings into his own business.

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