Investor profile is all about knowing your preferences in investment decisions. Before you start investing, it’s important to know the type of investor you really are. More often than not, we assess our strengths and weaknesses differently. Going through a formal investment profiling would help in creating a portfolio for the long term without having to re-evaluate every now and then.
So, making an investor profile depends on various factors like risk tolerance, investment goals, investment time horizon and changing financial circumstances and needs.
To determine your investor profile, you could ask yourself a few questions that can help you self-evaluate.
▪ Goal-based profiling
This can be understood by taking your income and expenses into consideration and then evaluating your disposable income. Calculating your disposable income is important. It tells how much money you can invest every month.
Once that is evaluated, there are a couple of funds that need to maintained. They are:
o Contingency fund with at least 12 months’ expenses
o Medical emergency fund for an illness which may or may not be immediately covered by health insurance
o Child’s education fund
o Retirement fund
Tip: There is not much you can do about your fixed expenditure like EMIs or other loan repayments. However, you can take stock of your discretionary expenditure and create a headroom for investment.
▪ Investment horizon
This can be broadly classified as short-term, mid-term or long-term based on your tenure of investment.
o Short-term investments are made for immediate goals in the next three years. These investments need to be kept handy and not be prone to volatility. Thus, it needs to be kept in a cash or liquid fund for easy access. Such investments are usually done to meet regular cash flow requirement and emergencies.
o Mid-term investments can help you meet your financial goals in five to seven years. Since the tenure is not long enough, your investment can be parked in medium-term debt investments or bank fixed deposits or even balanced funds because market volatility does not affect its liquidity after three years.
o Long term investments are for more than 10 years or indefinite timeline. Thus, equity exposure can be taken for long term investment needs.
Tip: The earlier you plan for your investments, the better it is so that it can be planned well ahead and the power of compounding can really work and do wonders for your portfolio!
▪ Investment profile
Once the disposable income and the investment horizon is known, the very objective of the investment needs to be ascertained. To determine an individual’s investment profile, his risk capacity, appetite and tolerance need to be known.
✓ Risk tolerance is the amount of risk you can take in your investment portfolio without losing your sleep over the volatility of the portfolio
✓ Risk capacity is the amount of risk you can afford to take so that your financial goals are not jeopardised.
✓ Risk appetite is the amount of risk you need to take in order to fulfill your financial goals.
The combination of all three (as depicted in the picture) is the risk profile of the individual.
Tip: You need to determine your risk-taking capacity and investment objective together so that you can maximize returns on your investment portfolio without taking too much risk exposure.
▪ Investment experience
If one has a considerable experience in investing, his risk-taking capacity is more accurately determined than others since he knows what is expected from each investment. For new investors, it is inevitable that a new investment option needs to be explored bone-deep before taking the plunge.
Tip: Age is often synonymous with lesser risk since time horizon is low.
▪ Asset allocation
Asset allocation is all about choosing an investment strategy and products based on your risk appetite.
Please note that it’s important to review your asset allocation once a year as it can change with time due to change in your investment goal and risk tolerance.
Tip: Equity is healthy and good for your portfolio but so is debt. A mix of the two blended with your investment objective and horizon can be ideal. So, monitor your ideal asset allocation at all times, irrespective of the market situations and you will see a marked difference in your overall portfolio.
In order to excel in your investments, you need to be completely honest in your evaluation of your investor profile. Self-evaluation can be quite tricky at times and thus professional help can help you define your financial goals. You need to assess your investment needs and then design an investment strategy more appropriately.
Disclaimer: Investment in securities market are subject to market risks, read all the related documents carefully before investing.