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How much risk can you afford to take

01 Sep 2016

riskEach money related investment has a risk-reward ratio attached to it. Hazard appetite can be characterized as the level of risk an individual will take in pursuit of return from their financial investment. While hazard appetite has turned into a typical trendy buzzword, investors are still uncertain about how to measure it. To truly understand your risk appetite, you need to first understand your risk-bearing capacity and risk-bearing tolerance.

Hazard bearing limit is the limit capacity an investor has to reach their financial objective. It will rely on your age, your financial health, as well as your position in the family. However, hazard bearing tolerance will depend on the broader outlook that you have of the economy, your past investment experience, and your financial knowledge.

Let’s take a look at some of these factors in more detail:

Age:

Risk tolerance often varies with age, income and financial goals. It can be ascertained by many methods, including questionnaires designed to reveal the level at which an individual can invest but still be able to sleep at night.

A young individual simply entering the job market will have a much higher ability to take risk than an elderly gentleman approaching retirement age. An elderly person will need to secure their financials and thus will need a less volatile portfolio. However, you should note that there may be exceptions to this.

Experience:

Experience plays an important role in every field, if you are a seasoned investor and have the experience of making investment in the past and having made a profit, then you are more likely to continue making them in the future. This increased risk appetite is because you have become comfortable with handling the risks associated with similar type of investments and can plan your finances around it. This will also give you more freedom to experiment with newer financial products.

Income:

The amount you are earning is directly proportional to your risk appetite. If you are earning a decent amount that leaves you with a surplus every month, then you will not hesitate to try risky financial instruments as the possibility of a small loss will not affect your financial health.

Insurance Cover:

If you have sufficient emergency funds as well as are covered well by health and life insurance, then you will feel more secure and consequently will be willing to take greater investment risks.

Financial Goals:

Having short-term financial goals will decrease your risk appetite as you cannot risk with your money. On the contrary, you will take bigger investment risks if you have long-term financial goals only.

Conclusion:

Before going ahead with any sort of investment, it is essential that you decide your danger appetite. For you as an individual investor, there are various online financial tools available to gauge your risk appetite.

By Sanjay Bansal | Founder & CEO | Affordable Homes India

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