Investment is a tricky arena of financial planning. One needs to be thorough about each aspect of the mutual funds, especially the risk it involves, before investing in it. In order to minimise the brunt of risk and maximise the profits from mutual fund investments, investors must be aware of their risk capacity.

What is risk profiling?

Risk profiling is an assessment of an investors risk tolerance on the basis of various investment parameters that help them to allocate their hard-earned money into suitable funds and related schemes. The financial experts assess the risk-taking capabilities of the investors through a thoroughly drafted formal questionnaire. The investors answer the questions that intend to assess their investment capability and suitability. The questionnaire includes parameters like the investor’s age, financial responsibilities, investment horizon, dependents, and details of loans, liquidity requirement, and theperiod of investment, the stability of income flow, understanding of the financial market and basics of investments.

Why risk profiling is important for selecting mutual funds?

The mutual funds have an array of schemes for different types of investors. Not all its schemes are meant for the investors with low to moderate risk appetite; it is crucial that investors are aware of their level risk tolerance and the risk involved with the scheme they wish to invest in. Risk profiling is important for selecting mutual funds as it prevents investors from selecting risky funds that may bring in heavy loss.
The major benefits of risk profiling are as follows: ​​​

• It gives the investors an idea about their risk appetite.
• It enables the investors to analyse their capacity to invest in various schemes.
• It allows investors to identify their potential risk and select investment schemes accordingly.
• It helps in selecting the most suitable funds for investments and improves the chances of accumulating more wealth.
• It helps the investors to diversify their investments as per their risk tolerance.
• It protects them against the potential risk of losing their money on unsuitable funds
• It acts as a cushion against loss and paves way for making profits.

What is a Risk-o-meter?

The Risk-o-meter is a scale that helps the investors toanalyse their risk appetite. As per the new system, the Risk-o-meter has five categories that indicate the level of risk involved with investments in the funds.

The following are the five categories that indicate the level of risk:

1. Low –the principal is deemed to be at low risk
2. Moderately low –the principal deemed to be at a moderately low risk
3. Moderate –the principal is deemed to be at a moderate risk
4. Moderately high –the principal is deemed to be at a moderately high risk
5. High –the principal is deemed to be at a high risk

​​The mutual funds investors need to be thorough about the criteria, attributes and risk parameters of the fund they want to invest in. Consult our professional financial advisors to find out more about risk profiling and the process of analysing the funds before investing in it.