Category Archive : Financial Planning

Risk Capacity + Risk Appetite + Risk Tolerance = Overall Risk Profile

Understanding risk appetite, risk capacity and risk tolerance is very important before making any investments or any investment decisions.

Risk Appetite –

Risk appetite can be defined as the amount and type of risk that an investor is willing to take in order to meet its financial goals. Investors will have different risk appetites depending on various factors. A range of appetites exist for different risks and these may change over time.

While risk appetite will always mean different things to different people, a properly communicated, appropriate risk appetite statement can actively help investors achieve goals and support sustainability.

Risk Capacity –

Risk capacity is the amount of risk that the investor can take in order to reach financial goals. The rate of return necessary to reach these goals can be estimated by examining time frames and income requirements. Then, rate of return information can be used to help the investor decide upon the types of investments to engage in and, the level of risk to take on.

Risk capacity is an objective measurement of the amount of risk you need to take in order to meet your established financial goals. It can also be used to assess the impact of any risk occurrence on your portfolio’s ability to meet your financial obligations.

Risk Tolerance –

Risk tolerance is a subjective measurement of your attitude toward risk, your willingness to accept potential investment loss in search of greater investment gain. Risk tolerance is the amount of risk that an investor is comfortable taking, or the degree of uncertainty that an investor is able to handle.

Risk tolerance often varies with age, income and financial goals. It can be determined by many methods designed to reveal the level at which an investor can invest, but still be able to sleep at night. Those with a higher risk tolerance are more comfortable with market volatility and uncertainty than those with a lower risk tolerance.

Risk aspects

Factors Affecting Personal Risk Profile

Risk taking capacity, appetite and tolerance changes depending upon various information and factors.

This can be understood with the help of following points:-

a) Depending upon Personal Information:-

1] Age –

When a person is young, he/she can take more risk as they don’t have much to lose. Also they have a longer time frame available with them to reap profits from their investments even if they suffer some losses along the way. Therefore, lower the age, higher the risk that can be taken.

2] Employability –

When a person has quality education and is skilled and qualified, he/she can find job anywhere. Moreover, these professionals don’t have to worry as their education, skills and qualities will help them earn money in some or the other way. They have a high employability level. Therefore, well qualified and multi-skilled professionals can afford to take more risks.

3] Nature of Job –

A person is stable when he/she has a stable source of income. Having a stable job gives a sense of security. When people have a sense security they can invest more freely. Thus, people with stable jobs can afford to take more risk and can more profits.

4] Psyche –

The psyche of a person that is their personality and characteristics also influence risk taking decisions. The response of people to profit or loss from their investments is critical. Some people are not good at accepting losses. The mentality, i.e is the thinking of a person plays a key role in investing. Having a positive outlook while investing helps earn more. Hence, adventurous and daring people are better positioned mentally to accept downside risk.

Risk depending upon personal attributes

b) Depending upon Family Information:-

1] Earning Members –

If the number of members earning in a family is high, then they have more amount to invest. There is no need to worry about few losses. This also means that their risk appetite is also high. Therefore, risk appetite increases as the number of earning members increases.

2] Dependent Members –

The number of members dependent on the earning member is of great influence. Fulfilling the needs and wants of all the members is a difficult task. Moreover, as there are more members dependent on the same person then there is not much scope to take risk. Hence, risk appetite decreases as the number of dependent members decreases.

3] Life Expectancy –

Life expectancy means the number of years a person might live. This number decides how to invest and when to reap the profits. If the life expectancy is low then there is no point planning for time period more than that. If the life expectancy is high then low risk is preferred. Thus, risk appetite is higher when life expectancy is longer.

Risk depending upon family information

c) Depending upon Financial Information:-

1] Capital Base –

A broad capital base means being financially sound. It provides a lot of scope for taking risk in investments. A higher capital base helps absorbs the losses incurred, if any. Having a high capital base acts a backbone. Therefore, higher the capital base, better the ability to financially take the downsides that come with the risk.

2] Regularity of Income –

Regular income indicates stability. A stable source of income is beneficial while investing. Knowing that there is income in the future can help take risks now. People with seasonal income cannot take high risks. Thus, people earning regular income can take more risk than those with unpredictable income streams.

These are just some of the aspects/factors that can help you analyse your risk taking capacity or appetite. Also the above are thoughts are derived by observing a general trend. People may behave differently.

Risk depending upon financial information

Financial Life Cycle based on Personal Risk Profile

Aggressive Risk Profile –

Young and unmarried investors should choose this risk profile.

Aggressive investors want to make more money, and they want to do it in style. They tend to take extravagant risks. Aggressive investors don’t mind losing money because there’s more where that came from or they already have substantial funds in reserve. They tend to invest in high risk products.

This suits investors with a more than 20-25 year timeframe. The 100% exposure to growth assets (shares and listed property) means that capital stability is not a consideration.

Growth Risk Profile –

Young and married people should opt for this risk profile.

Moderately aggressive risk-takers are long-term investors who can patiently wait for their stocks to increase in value. Although this kind of investor may lose more than average when the market is down, growth investors also tend to gain more when the market swings back up. Their investments are in combination of high risk products & moderate products.

This suits investors with a 15-20 year timeframe. The 80% exposure to growth assets (shares and listed property) means that capital stability is only a minor concern.

Moderate Risk Profile –

This risk profile can be opted for by married people with young children.

Like almost everything else in life, the majority of investors fall in this category, right in the middle. These investors lose less when the market goes down and gain a little more than average when the market goes up. They prefer a balanced portfolio and are usually invest in moderate risk products.

This suits investors with a 10-15 year timeframe or those who seek both income and capital growth. Hence, 50% exposure to growth (shares and listed property) and 50% exposure to defensive (cash and fixed interest) assets.

Conservative Risk Profile –

People in the pre-retirement phase can go for this type of risk profile.

Conservative investors are generally a little older and are preparing for retirement. They might also have experienced large losses in the past. They want to take more risks than secure investors do, but they also want to protect themselves from losses during downside fluctuations in the market.

This suits investors with a minimum 5-10 timeframe or those who primarily seek income with some potential for capital growth. Hence, 80% exposure to defensive assets (cash and fixed interest).

Secure Risk Profile –

Retired people generally prefer and opt for this risk profile.

Unlike aggressive investors looking to make quick money, most secure investors only want to hang on to what they have. Many secure investors can no longer work and are unwilling to risk losing any of the income they have left. Most of the time, investors who cannot tolerate any risk whatsoever are better off leaving their money in a bank account.

This suits investors with a minimum 2-5 year timeframe. This portfolio suits investors who give a high priority to the preservation of capital. Hence, 100% exposure to defensive assets (cash and fixed interest).

The above information can be used as a guideline and there are no compulsions to follow this approach. Above approach can help to choose your risk profile and mange your investments.

Of course, this is just an overall look at the risk profiles and who should opt for them. You may find that one of these risk profiles describes you perfectly. Whatever category or categories you feel best describe your investment strategy, using a risk profile can help you determine what investments will work for you and what benefits they will have.

Types of Investment (depending upon risk):-

Very High-Risk Products: Crypto-currencies, Mid-Cap Funds, Small Cap Funds

High-Risk Products: ULIPs and Exchange Traded Funds (ETF), Large Cap Funds

Moderate Risk Products: Bonds

Low-Risk Products: Savings in bank

Financial Risk Profile

HDFC Tax Saver Fund !

Category : Tax Saving (Equity)

AUM: Rs. 7,017 Crore

Benchmark : Nifty 500


Large Cap Stocks : 81%

Mid Cap Stocks : 14.5%

Small Cap Stocks: 4.5%

Top 5 Holdings: 

  1. HDFC Bank (7.31%)
  2. ICICI Bank (7.11%)
  3. SBI (6.82%)
  4. NTPC (5.85%)
  5. Reliance Industries Ltd (5.42%)

Top 5 Sector Allocations:

  1. Banks (24.42%)
  2. Power (10.35%)
  3. Construction Project (8.75%)
  4. Software (7.27%)
  5. Petroleum Products (6.89%)
24 Mar 2018 - HDFC Tax Saver Calendar
24 Mar 2018 - HDFC Tax Saver Trailing

ICICI Prudential Long Term Equity Fund !

Category : Tax Saving (Equity)

AUM: Rs. 5,034 Crore

Benchmark : Nifty 500


Large Cap Stocks : 69.5%

Mid Cap Stocks : 28.5%

Small Cap Stocks: 2%

Top 5 Holdings: 

  1. NTPC (4.93%)
  2. SBI (4.47%)
  3. Nestle India (4.06%)
  4. HDFC Bank(4.00%)
  5. ITC (3.86%)

Top 5 Sector Allocations:

  1. Financial Services (23.38%)
  2. Energy (11.61%)
  3. Healthcare (10.66%)
  4. FMCG (10.16%)
  5. Automobiles (10.06%)

23 Mar 2018 - ICICI Pru Long Term Equity Calendar
23 Mar 2018 - ICICI Pru Long Term Equity Trailing

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