Risk Profiling & Financial Planning

Risk Profiling & Financial Planning

Mr. Gurmeet and Mr. Rajesh are both working professionals. Gurmeet is a 28-year-old young individual and Mr. Rajesh is in his early 40’s.

Do they have the same risk profile?

The answer is NO. Let’s take another example, suppose both are of the same age with one being a salaried employee and other a businessman, again the same question “Do they have the same risk profile?”

The answer will still remain the same “NO “. Why?

Risk profiling before any investment is an immensely critical part. Many of us fail in assessing the risks involved with individuals and investment. A 28-year-old salaried professional will have different risk profiles compared to a 42-year-old salaried professional. Similarly, 28-year-old a businessman will have different risk profiles compared to a 28-year-old salaried professional. Their life’s financial goals are different, their risk appetite is different.

In today’s world, each individual has its own set of financial goals that differ from other individuals. Hence, there is nothing as “ready-made Financial Planning” or “ Common Financial Product for Individuals”.

It is mandatory or rather a hard line prerequisite to asses risk associated with individuals before making any investment decision. Risk assessment is evaluated based on the below-mentioned parameters.

Factors affecting risk profiling:

1. Age: Age is an important parameter in assessing risk for individuals. A 28-year-old individual might have higher risk appetite compared to a 42-year-old whose risk appetite, in turn, would be higher compared to a retired individual. If we consider retirement age as 58 then the young individual has almost 30 years with him in comparison to 42-year-old individual who has 16 more years before retirement.

 2. Income: While making any risk profiling, all individuals should consider their per month or per annum income inflow. A businessman might have a different inflow of income compared to a professional with fixed monthly income. Hence, each individual has different cash inflows like fixed for few and variable for others.

 3. Expenses: Monthly expense calculation in mighty important. The monthly expenditure of a family is mostly fixed when we consider only basic needs for all individuals. It includes rent, children’s education, grocery expenses, EMI expenses or fuel expenses to name a few, and should be calculated every month. It gives an idea of the variations involved in one’s expenses. Obviously, it differs from individual to individual as each has different needs. For e.g. a 42-year-old might have a family to care for as compared to a 28-year-old individual who might have educational loans to take care of.

 4. Current Balance Sheet: Usually, Individuals hesitate in disclosing current investments or inherited property or Investments with financial planners while getting a financial planning report generated or assessing risk. Absence of such crucial information usually leads to wrong financial planning or risk profiling.


 5.   Time Horizon: All individuals have different time horizons for their investment. Generalizing this may hamper risk profiling in choosing the right asset class for an individual. In general terms, longer the horizon better the return but again it depends on an individual’s investment horizon which defines his/her risk appetite and product selection.

 6.   Financial Obligations: Before assessing the risk profile for an individual, it is important to understand his/her family responsibilities, number of dependents, etc. An individual hailing from a joint family might have sliced liabilities/responsibilities as compared to an individual with a nuclear family. Families with single bread earners will have a different risk profile compared to a family with multiple working hands. A person with dependent parents will be towards the higher end of monthly expense chart compared to an individual having a nuclear family to care for. All these factors are important and should be assessed before making any risk profile report or financial planning report.

 7. Lifestyle: With a thousand-year-old cultures and diverse ancient regimes, Indian lifestyles have always been fascinating. In recent times Indian lifestyle had seen a gigantic shift with the intervention of modern routines in upbringing. Spending capacity for better quality of life has increased immensely in recent years. The trend in spending on consumer services and other non-essential expenditure is broadly increasing. And hence becomes a major parameter in risk profiling.

 8. Financial goals: Major of individuals never consider setting their financial goals at the age of 30 or 35 as a priority. This realization comes mostly between 40-45 years of age. But that doesn’t imply that financial planning or risk profiling cannot be done for them. Until one gets in trouble waters, financial goals are kept at the back seat which unfortunately leads to the wrong selection of financial products. Which neither gives good return and may have high risk as per asset class. Before any investment it is crucial to define financial goals, it helps one in choosing the right products at the right risk parameter.

9.  Health: The health profile of an individual is an important factor and helps in assessing risks for him. Insurance is an important part of any financial planning. Be it health or life, everyone needs insurance for unforeseen situations in life. Financial planning may also go on toss because of an unfortunate situation. We take insurance as arbitrage products towards one’s life goals. By assessing health-related risks, a planner can advise the right amount of term plan or health plan.

 10. Need or Greed: Many individual’s needs are mixed with greed, which ultimately leads to entire risk profiling based on the return of financial products. Equity is no doubt a high return product that comes with high risk associated. Returns should be considered as a byproduct while building financial plans by yourself or with your planner.

Assessment based on the aforementioned parameters gives you the right risk-based products for your needs. This eventually helps in lowering risk at any time horizon. Always remember patience and right financial planning will always help you in the right product mix with lesser risk.

Any investment without direction will fail in fetching desired results. Individuals may get medium-term results in no time but in the longer run, it may lead to high risk and wrong asset allocation. Unforeseen events in life, wrong assessment of risk, wrong choice of financial products can lead to disaster. Thoroughly evaluated and assessed risk profiling will always lead to better financial planning.

We would like to emphasis that Financial Planning & Risk profiling can be done for an individual at any age. Only product selection differs according to risk assessment. Better to make well evaluated and informed decisions than regret In the future.

Disclaimer: The author is Rohit Khandelwal. He is an AMFI registered mutual fund advisor.  All views expressed in the article are his own. Moneymatters.co.in or Infomagine consultant LLP doesn’t guarantee any accuracy of date. All shown rates of return are tentative, not guaranteed in nature to anyone.

Mutual funds are subject to market risk, kindly read the scheme related documents before investing.

Insurance is the subject matter of solicitation.   





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