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  • Stories
  • INV Scinvest Risk Profiling

Choosing Mutual Funds Wisely: The Importance of Risk Profiling  

Introduction

What Is Risk Profiling?

Risk profiling assesses an individual’s capacity and willingness to take investment risks based on three factors:

Risk Capacity: Investor’s financial ability to handle potential losses, income, expenses, investment horizon, and obligations.

Risk Tolerance: Investor’s psychological readiness for investment volatility. Some prefer stable returns, while others accept higher risks for potentially higher returns.

Risk Requirement: The risk needed to meet financial objectives. Ambitious goals may require higher risks.

Types of Risk Profiles

Risk Averse
You do not want to take any investment risk and would like to safeguard your capital by growing it at the current deposit interest rates, which may or may not keep pace with the rate of inflation. You do not want to invest in investment products which may have an investment loss.
Conservative You aim to achieve investment returns higher than current deposit rates. You are comfortable with achieving a low level of return potential on your investment and accept some investment risk to achieve your objectives. You are aware that the value of your original investment may fluctuate and are able to accommodate potential capital losses over your investment horizon in pursuit of your longer-term investment return objectives.
Moderate You wish to balance modest capital growth with income generation through a more balanced proportion between growth and income generating assets, predominantly composed of fixed income and equities. While your potential returns are higher, you appreciate that the potential for capital losses is also higher. You are aware that the value of your original investment may fluctuate and are able to accommodate potential capital losses over your investment horizon in the pursuit of your longer-term investment return objectives
Moderately Aggressive You aim for higher potential capital returns and are willing to accept higher levels of loss/volatility. Capital protection is not as major a concern as compared with longer term capital growth. Your portfolio will predominantly be growth focused (i.e., have a higher exposure to equities), while aiming to diversify risk with exposure to alternatives and fixed income. You are aware that the value of your original investment may have higher fluctuations and are able to accommodate larger potential capital losses over your investment horizon in pursuit of your longer-term investment return objectives.
Aggressive You wish to substantially grow the long-term expected value of your investment and accept that this may result in higher volatility and risk to capital returns. Typical client portfolios will have a major growth focus (i.e., predominant exposure in equities). You are aware that the value of your original investment may have substantial fluctuations and are able to accommodate significant potential capital losses over your investment horizon in the pursuit of your longer-term investment return objectives.
Aligning Mutual Fund Investments with Risk Profile

Once an investor understands his risk profile, it is essential to align the mutual fund investments with his risk profile. Here are some examples of mutual fund types and a basic understanding of their associated levels of risk:

  • Best low-risk mutual funds include liquid, overnight, and certain arbitrage funds. They suit investors with a conservative risk profile.
  • Moderate-risk mutual funds: Fixed maturity plans, debt-oriented schemes involved capital protection, and certain arbitrage funds.
  • High-risk mutual funds: Equity mutual funds – Sectoral or thematic funds, mid-cap and small-cap funds, and certain aggressive hybrid funds.

It is important to note that people may have different risk profiles for different goals. For instance, one may have a conservative risk profile for his emergency corpus but an aggressive risk profile for his long-term wealth creation goals.

Conclusion

Mutual fund investments require a thorough understanding of the risk profile. Knowing one’s risk capacity, tolerance, and requirements, an investor can make informed decisions and achieve financial goals efficiently. Whether one is a conservative investor or a moderate investor, it is important to choose mutual funds based on your risk profile for better returns.

If an investor finds it difficult to match his/her risk profile with that of the chosen scheme, then just open Standard Chartered Investment Account and use the “Fund Select” feature to get access to the top funds hand picked by experts, that align with your risk profile. Still not sure, check out our Smart SIP option to invest in a pre-curated SIP pack basis your risk profile. If you need any further assistance, Standard Chartered Wealth managers are just a call away. Click here to schedule a call back for any further assistance.