What Is Risk?: Investment Pattern On The Basis of Risk Profile of Investors

INTRODUCTION
INVESTMENT PATTERN ON THE BASIS OF RISK PROFILE OF INVESTORS
WHAT IS RISK?
The word ‘risk’ has a definite financial meaning. It refers to possibility of incurring a loss in
a financial transaction. In a broad sense, investment is considered to involve limited risk and is
confined to those avenues where the principal is safe. ‘Speculation’ is considered as an
involvement of funds of high risk.
TYPES OF RISK
1. SYSTEMATIC RISK
2. UNSYSTEMATIC RISK
SYSTEMATIC RISK
Systematic risk refers to that portion of the total variability of the return caused by common
factor affecting the prices of all securities alike through economic, political and social factors.
UNSYSTEMATIC RISK
Unsystematic risk refers to that portion of the total variability of the return caused due to unique
factors, relating that firm or industry, through such factors as management failure, labour
strikes, raw material scarcity etc.
WHAT IS INVESTMENT?
Investment is the purchase of an asset or item with the hope that it will generate income or
appreciate in the future and be sold at the higher price.
INVESTMENT RISK PROFILE
All investors have differing attitudes towards risk. When it comes to investing, it is important
to consider your risk profile or tolerance carefully, including how comfortable you are with the
possibility of losing money, or that returns on your investments could vary widely from year
to year.
Understanding your personal risk tolerance will help you choose an appropriate asset
allocation - the following points can help you to determine an investment mix that's appropriate
for your needs.
INVESTMENTEXPERIENCE
How would you describe your investment experience and understanding of financial markets?
 Just started investing in the last year

 You understand the basics of investing
 You have been investing on your own for several years and are reasonably confident of
your knowledge of financial markets
 Your knowledge of financial markets is well above average and you make investment
decisions confidently
RISKTOLERANCE
To establish investment strategies that suit your profile of risk and will be comfortable with,
you need to consider the possibility that the value of your investment may decline even though
this may be temporary. Are you prepared to accept the possibility of a negative return at any
time in exchange for potentially higher long term returns? What percentage of your money
would you be prepared to invest in higher-risk investments?
Which of the following is important to you:
 Avoiding any short-term losses

 Receiving regular income from investments
 Long-term growth in the value of investments
 Protection against inflation
In October 1987 the stock market fell more than 20% in one day. If you owned an
investment that fell by 20% in a short time what would you do or what did you do in
1987: Sell all of the remaining investment (Conservative)
 Sell a portion of the remaining investment (Conservative to Balanced)

 Hold the investment and sell nothing (Balanced or Aggressive)
 Buy more of the investment (Aggressive)
INVESTMENT GOALS AND OBJECTIVES
Why are you investing? Is it for something in the near future (new car, or down payment on a
home) or something farther off (a young child's education or your own retirement)? If your
investing goals are short term you want your money to be there - with interest - when you need
it. Therefore, you will need to focus on relatively short-term investments like term deposits or
a cash management trust. If on the other hand, you are investing for the long term, you may be
able to afford to take some risk in pursuit of a higher return. Shares, property, and growth
orientated managed which historically have provided higher returns than fixed interest or cash
over time, may be more appropriate.
INVESTMENT TIMEFRAME
When do you expect to need to access all or part of your investments:
 Less than 1 year (immediate access)

 Less than 2 years (short term)
 2 to 5 years (short to mid-term)
 6 to 10 Years (mid to long term)
 Over 10 Years (long term)
LIQUIDITY CASH REQUIREMENTS

How much money do you need to keep available for emergencies such as house repairs, a
dental emergency or serious car repairs? These emergencies can be a serious setback if you
are not prepared. The amount of your emergency fund will depend on your current lifestyle
and expenses. As a general rule you should have about 3 months of income set aside to meet
emergencies without needing to rely on credit cards. A cash management trust that pays high
interest can be a good place to keep emergency funds.
Risk Profile Investment Style
Conservative Your primary investment goal is capital protection. You require

stable growth and/or a high level of income, and access to your
investment within 3 years.
Cautious Your primary investment goal is capital protection. Investors in

this risk profile require fairly stable growth and/or a moderate level
of income. Your investment term is 3 years or more.
Moderate Your primary investment goal is capital growth. You can tolerate
some fluctuations in the value of your investment in the
anticipation of a higher return. You don't require an income and
you are prepared to invest for 5 years or more.
Moderately Your primary investment goal is capital growth. Investors in this

aggressive risk profile can tolerate a fair level of fluctuations in the value of
your investment in anticipation of possible higher returns. You
don't require an income and you are prepared to invest for 5 to 10
years.
Aggressive Your primary investment goal is long-term capital growth. You

can tolerate substantial fluctuations in the value of your
investment in the short-term in anticipation of the highest
possible return over a period of 10 years or more.

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INTRODUCTION

INVESTMENT PATTERN ON THE BASIS OF RISK PROFILE OF INVESTORS

 Just started investing in the last year

Which of the following is important to you:

 Avoiding any short-term losses

 Sell a portion of the remaining investment (Conservative to Balanced)

INVESTMENT GOALS AND OBJECTIVES

 Less than 1 year (immediate access)

LIQUIDITY CASH REQUIREMENTS

Risk Profile Investment Style

Conservative Your primary investment goal is capital protection. You require

Cautious Your primary investment goal is capital protection. Investors in

Moderately Your primary investment goal is capital growth. Investors in this

Aggressive Your primary investment goal is long-term capital growth. You

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