Asset Allocation and Risk Profile

Investments in stock markets are risky and some people tend to have more tolerance than others when it comes to market risk and risky investments. An investor’s age and financial goal are the major determinants of their risk profile and it keeps changing as one grows in age and moves from one financial goal to another. Understanding one’s financial goal and associated risk are very important to select the right type, blend and composition of investments. This being the prime reason why investors should allocate their resources on the basis of their changing market needs and risk factor.

Why should you allocate your assets based on your risk profile and not the opposite?

An investor’s risk profile takes into consideration their risk capacity, financial standing, financial goal and investment horizon. Investors need to allocate their assets according to their risk profile in changing market scenarios to ensure that they do not end up exposing themselves to the market risks more than advised.  Moreover, accounting one’s risk profile for asset allocation encourages taking some amount of risk to earn required returns to meet their potential financial goal within their set time horizon.

Given that the performance of a particular group of assets and movement of interest affect the portfolio of an investor, there are primarily three types of portfolios on the basis of risk and asset allocation.

  1. Conservative portfolio: In this particular type of investment portfolio, the asset allocation aims at generating a flow of income for those who have a low tolerance towards risk and are very much dependent on a regular stream of income. In a conservative portfolio, the primary focus is towards income generation and not for capital growth in the long run. The portfolio’s low volatility level make is somewhat agreeable to conservative investors and investors with low-risk capacity.
  2. Balanced portfolio: In a balanced portfolio, the allocation of assets focuses on a mix of growth and income. This allocation helps investors to cushion risk and market volatility and also to earn a steady return. A portfolio with balanced asset allocation is most suitable for investors who want to build their retirement corpus.
  3. High growth portfolio: Those investors, especially the young ones, who have a long investment horizon, high-risk capacity and want to pursue growth fall under this portfolio. Such a growth-oriented portfolio is exposed to share market and its returns rely heavily on the performance of the shares investors have invested in.

After taking their risk profile into consideration, investors should diversify their portfolio by allocating their assets in both growth and income based assets properly and in a balanced way to avail a command over the risk and return aspect of their portfolio. Learn from our team of financial experts and advisors how to diversify your profile by allocating your assets on the basis of your risk profile. You can also avail their assistance to earn a steady flow of returns in the long run with minimum risk through proper asset allocation.

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Mutual Fund investments are subject to market risks, read all scheme related documents carefully. Past performance is not an indicator of future returns. Wealth Redefine is a AMFI registered Mutual Fund distributor – ARN - 167127

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