WILLINGNESS TO TAKE RISK IS NOT YOUR RISK APPETITE

Today we have wide investment options to invest our hard earned money to achieve our goals.Depending on our Greed or Fear, we choose products to invest. Some choose mutual funds; some choose direct investment in shares whereas some opt for PPF, Bank FDs or any other debt products. While before investing in any of the financial product, it’s important for an investor to consider his/her risk appetite. Risk appetite is the amount of risk that an investor can bear on its investments.

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Importance of the Risk Appetite:

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Suppose Mr. A and Mr. B invested Rs100 in XYZ Share. After some days the value drop to Rs 90, at this point both were calm, and accepted that this happened because of market volatility. After some more days, again price went down below70. At this point, A starts feeling oohh… and ouch… in his stomach. This is the point where his emotional pain increases to a point where he can no longer stay with this investment. That is the risk appetite for A whereas B is not affected that much, still he can take loss of 20 more, only where prices drop below 50, he may feel jitter.

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But here the question arises in the mind that how can we judge our risk appetite. Risk Appetite is determined from many factors like our expectations, current situation and past experiences of investing. In developing nations like India, we can find many investors who have high risk appetite and can take high risk to achieve high returns. But there is a high probability that while considering the risk appetite; investor may forget to consider the “Ability to take risk”. It’s not important whether he is willing to take risk or not.

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Willingness to take risk and the ability to take risk both are most important factors that one should consider before deciding the risk appetite.

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Willingness to Take Risk:

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This depends on our inherent nature, our attitude towards life, finance domain, Knowledge of financial products etc. Our whole upbringing will contribute towards this because our willingness to take risk will depend on our inherent self, who we are from inside. So you can either be extra cautious by nature and may not be willing to take risks or you can be a big risk taker and bet money on anything.

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Ability to Take Risk:

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This is the next important part in Risk taking. Does your situation allow you to take risk or not? It has nothing to do with your willingness to take risk, you can be a risk taker and dying to bet on the next multibagger or invest in that 100% return a year mutual fund, but you have to consider the worst case at the end. You have to visualize the worst case as if it has happened after you take that risky decision.

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While concluding, I wish to say that before investing in any financial asset one should judge his risk appetite. We should always take calculated risk (as per the willingness & ability to take risk) and being aware of what will be the outcome. Risk taking should be a rational, not an emotional, decision. We should know what can be the impact of taking decision. Hence, we must take risk which is required for meeting our financial goals. Taking Over-risk is same as taking Low-risk.

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