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
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Risk Averse
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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.
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| 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. |
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:
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.
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.
Risk profiling is of the essence for making informed investment decisions. It helps ensure you select assets based on your risk appetite & comfort level against any potential volatility in your investment portfolio, avoiding overexposure to risk that causes emotional and financial distress, and underinvesting in assets which may fail to provide the requisite growth for your financial goals.
Regular risk profiling should be undertaken whenever an individual sees changes in their income, assets and liabilities. These may typically be brought on by major life events such as career changes or progression, retirement, marriage, or even purchasing a house. As a general rule of thumb, it is a good practise to revisit one’s risk profile every year.
Generally, the lower an investor’s age, the more risk they can afford to take on. This is because it gives them more time in the market and an opportunity to recover from any potential losses or volatility they may face in the short and long run.
An investor’s risk profile plays a significant role in determining their portfolio’s asset allocation strategy. While conservative investors may prefer to invest in debt instruments such as government and corporate bonds that offer stable, albeit slightly lower returns, more aggressive investors may prefer to prioritise equities, which do offer higher returns but are also subject to higher levels of volatility.
Yes, an investor can have different risk profiles with respect to different goals. Whereas one may have an aggressive, high risk-return profile for fulfilling goals such as a downpayment buying a car, they may be more conservative for goals such as such as building an emergency fund or retirement corpus.
At Standard Chartered Bank, three factors are mainly considered for investor risk profiling. These are risk capacity (an investor’s income and expenses and ability to recover from potential losses), risk tolerance (an investor’s psychological tolerance for volatility), and risk requirement (the risk requisite for meeting one’s stated financial objectives).
No, risk profile tools are merely advisory in nature. They can help potentially provide one with the groundwork required to plan their investments. That said, it is also prudent to always plan one’s investments after consulting a qualified financial advisor to ensure one’s investments are aligned with one’s risk profile as well as financial goals.
While risk profiling is done to assess an individual’s personal preferences vis-à-vis taking on risk, risk assessments are used to determine the risks associated with, and the returns on investments into a specific asset or asset class.