Do you really know your Risk Profile?

 

When we meet friends or family, we often talk about how much return we have earned from our investments.

 

But have you ever heard someone proudly say, "I lost 20% because I took too much risk"?

 

Probably not.

 

Most of us enjoy talking about our investment gains, but very few discuss the risks they took to achieve those returns.

 

The reality is that returns and risk always go hand in hand. While returns help create wealth, understanding and managing risk is what helps protect that wealth.

 

Before chasing returns, understand your risk profile

 

Every investor has a different financial situation, responsibilities, and goals. That's why an investment that is suitable for one person may not be suitable for another.

Your risk profile depends on two important factors:

 

 1. Risk Capacity

 

 

 

 

 2. Risk Tolerance

 

 

Both are equally important when making investment decisions.

 

Illustration 1

 

Suppose I am in my early 40s with a family to support. I work in a private company, have an ongoing home loan, and most of my investments come from my monthly savings. While I may consider myself comfortable with taking higher investment risk, my financial responsibilities and liabilities mean that my risk capacity is actually moderate. In other words, my willingness to take risk may be high, but my financial situation does not fully support taking excessive risk. Choosing investments that are too risky could have a significant impact on my family's financial security and make it difficult to achieve my long-term financial goals.

 

 

Illustration 2

 

Now consider a young professional who has recently started working in an MNC. He has an education loan but no major family responsibilities and has a long investment horizon of 25–30 years. From a financial perspective, his risk capacity is relatively high because he has many years of earning potential ahead of him and sufficient time to recover from short-term market fluctuations. However, if he prefers stable investments and feels uncomfortable with market volatility, his risk tolerance is low. In this case, although he has the financial ability to take higher risk, his personal comfort level leads him to choose a more balanced and conservative investment approach. This highlights an important point: a successful investment strategy should align not only with your financial capacity to take risk but also with your willingness to accept it.

 

 

Why looking only at returns can be dangerous

 

Many investors invest simply because they hear statements like:

 

"This investment generated 30% return last year."

 

 But before investing, ask yourself one simple question:

 

"If this investment falls by 20% due to market volatility, will I be comfortable holding it?"

 

If the answer is No, then the investment may not be suitable for your risk profile.

 

Remember, an investment is suitable only when both the potential returns and the associated risks align with your financial situation and long-term goals.

 Avoid investing based on:

 

• Friends' or relatives' recommendations
• Social media stories
• Recent high returns
• Fear of Missing Out (FOMO)                                                                                                                                                                                                                             

Every investor's journey is different.

 

A simple way to think about risk

 

 

 

 

The best investment decisions are made when your investment strategy matches both your risk capacity and your risk tolerance.

 

Your risk profile changes over time

Your risk profile is not permanent.

 

 It should be reviewed whenever there is a significant life event, such as:

• Marriage
• Birth of a child
• Buying a house
• Taking a home or education loan
• Career change
• Business income fluctuations
• Retirement or nearing retirement
• A significant increase in wealth

 As life changes, your investments should change too.

 

Successful investing is not about earning the highest return.

It is about earning returns that you can comfortably stay invested for over the long term.

 

The right investment is not necessarily the one that delivers the highest return, it is the one that matches your goals, financial situation, and ability to handle risk.

 

Before making your next investment decision, take a few minutes to understand your risk profile and discuss it with your financial advisor. A well-planned investment journey is built not only on return expectations but also on a clear understanding of the risks involved.

 

Suggestion

 

"Risk is not about how much your investment can fall. Risk is about whether you can stay invested when it does."

 

 

HAPPY INVESTING!

 

Neeru Seal | Partner

 

 Alpha Research

 

Disclaimer: The information on this document is provided for information purpose only. It does not constitute any offer, recommendation The views expressed by the Alpha Capital Research are based on current market conditions and information available publicly