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.
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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