Investors investing in capital markets must access their risk profile first.

And then we must decide the asset allocation and follow that asset allocation.

In addition, this risk profiling must be reviewed at least once a year.

Risk Profile Definition…

A risk profile is an analysis of types of risks faced by individuals and companies.

In addition, for individuals, a risk profile is the amount of risk that he/she is inclined to take on the investment portfolio.

Risk profile for individuals…

An individual risk profile represents the amount of risk he/she is willing to take in the investment portfolio.

In addition, investors who are willing to take high risks may invest in alternative investments or lesser-known companies and unproven stocks that have higher potential growth.

And the investors who are risk averse or not willing to take higher risk can invest in lower risk or stocks that have proven historical returns.

Again, safer or low-risk options means blue-chip stocks, money market funds, liquid funds bonds, etc.

Investor risk profile depends on his preferences, age, and time horizon of the investment and financial goals, etc.

What does a balanced risk profile mean? …

This type of investor in both safe investments like bonds, liquid funds, bank fd and PPF, etc.

In addition, the investor also invests some portion in stocks for growth purposes apart from the above investments.

However, the ratio of both safer and high-risk asset allocation may be 50%:50 and sometimes times 60:40.

And this ratio completely will defer from investor to investor.

Again, an investor who is just retired may not invest more than 20% in stocks and balance 80% in safer investments.

How will the risk profile be measured? …

Investor can meanore it by answering the questions about their preferences age, time horizon, financial goals, etc.

In addition, based on the way investors answer the questions, an output of investor type and a risk score will also come out.

Moreover, based on the risk score and investor type, asset allocation must be selected.

However, you can measure your risk profile with this online free tool.

Investor preferences play a vital role in deciding whether he should invest in safer or high-risk options.

In addition, investors who have a higher willingness for risk can invest more money in higher-growth and less stable investments.

And investors who are risk-averse can opt for blue-chip stocks, which are less volatile and more stable, debt funds, bonds, etc.

Finally, time horizon also plays an important role in deciding the asset allocation.

In addition, investors whose retirement is far away can take high risk and can invest in high-volatility and higher growth potential assets like stocks and equity mutual funds up to 80% of their money.

When it comes to an investor whose retirement is nearing, they may prefer capital safety and low volatility.

And he may invest only 20% in high-growth assets and balance 80% in safer and low-risk assets.

However, not only time horizon, you should consider other factors also before deciding the asset allocation for you.

Read about debt fund types after sebi categorisation…

Also read about asset allocation and its importance…

And read about tactical asset allocation—all you need to know…

Also read about strategic asset allocation—All you need to know…

And read about types of investors based on your risk profile…