Risk profile: meaning and how to find yours

The three parts

1. Risk capacity: how much loss you can afford. Income stability, dependents, loans, emergency fund. A 30-year-old with a steady job and no loans can absorb more than a 55-year-old with a home loan and one earner.
2. Risk willingness: how much loss you can stomach. How you felt and acted the last time your investments fell 20%. If you sold in panic, your real tolerance is lower than you believed.
3. Risk need: how much risk your goal requires. If your retirement goal needs 12% a year, a portfolio that only earns 7% in safe assets will miss it. The goal sometimes demands more risk than you like, and the honest answer is to save more or extend the time, not to take reckless risk.

Your profile is the lowest of the three, not the average. If capacity is high but willingness is low, build the portfolio around willingness, or you will abandon it at the worst time.

A five-question self-check

1. If your portfolio fell 25% in a quarter, what would you do?
2. How many months of expenses are in your emergency fund?
3. How many people depend on your income?
4. When do you need this money: under 3 years, 3 to 7, or more than 7?
5. Do you have loans with high EMIs?

Short horizon, few months of cushion, many dependents and a panic-sell instinct point to a conservative profile. Long horizon, a solid cushion and a calm response point to an aggressive one.

How a profile maps to funds (illustration, not advice)

The exact mix depends on goals and time, which is why asset allocation is set goal by goal, not for the whole portfolio at once.

Common mistakes

• Answering a questionnaire after a bull run, when risk feels free.
• Using one profile for every goal. A child's education in 15 years and a car in 2 years need different risk levels.
• Confusing it with the riskometer, which describes the fund, not you.