Knowing your investor profile will help you work out the kind of investments you should consider.
There are various dimensions to your investment profile:
|Investment Objective||What is your goal?|
|Investment Horizon||How long will it take to achieve that goal?|
|Returns||What rate of return will help you achieve that goal?|
|Liquidity||Do you require immediate cash?|
|Risk||How much risk are you willing and able to take?|
|Financial Situation||What is your current level of wealth?|
Your Investment Objective
Are you looking to invest for your retirement, a home, your child’s education or a trip around the world? Regardless of your goal, you need a strategy that provides the right results.
For instance, if you are starting out in your career, you are probably looking to invest with more than one goal in mind: retirement, a future home, a family and, of course, a well-deserved break at your favorite destination. Each of these goals requires a different approach.
You will need to determine, whether your investment horizon is short term (less than 1 year), medium term (1 year to 3 years) or long term (5 years and more). Such a time frame will depend on your current level of saving/ investment, your risk profile and the goal that you wish to achieve.
With respect to your risk profile, you would normally want to select a longer investment horizon if you are investing in riskier instruments such as stocks, while a shorter investment horizon will be selected if you are investing in conservative instruments such as money market instruments.
Returns – income or capital appreciation?
Expectation of returns vary with the type of investment that is being considered. Generally, for any investment the higher the risk higher the return is expected and vice versa.
It may be helpful to think of Returns in a framework that involves either receiving stable income or seeking capital appreciation.
– If you are seeking current income, then you may want to opt for a product that aims to preserve your principal value while providing you regular income. In this case a suitable option will be to invest in a Money Market Fund or an Income Fund.
– If you are looking for capital appreciation, you may select an instrument that aims to provide capital growth over the long term. In this case, a suitable option can be an equity fund.
Liquidity refers to the ability to quickly convert an asset or security or an investment into cash at the marketplace, without significantly affecting it’s price.
Real Estate, Commodities, etc are usually considered illiquid investments, while cash at bank or with mutual funds, etc are generally considered to be fairly liquid.
Risk and reward is the classic investor’s balancing act. It is wise to start your investment journey carefully in order to properly assess your tolerance.
Your risk tolerance level is a key element to defining your investor profile. If your objectives consist of earning regular income and preserving your capital and high returns are not your priority, a portfolio of low-risk investments that provide stability may be the perfect solution for you.
If, however, you are building a retirement nest and investing over the long term, you may want to increase the risk level of your portfolio to boost its growth potential.
The higher the risk you take, the higher returns you could potentially receive, but the more chance you have of your investments losing value, fluctuating in value, or failing entirely.
With a low-risk investment, you generally know the range of return you will receive right up front but compared to riskier investments, like equities, the return is not very high. The risks come in two types:
Volatility: The possibility that the value of your investment will fluctuate in either direction.
Performance: The possibility that the investment could fail and you lose all or part of your money – or the investment gives you a lower return than what you expected.
Current Level of Wealth
Your current level of wealth helps you determine the level of risk you can tolerate in your investment portfolio. Investors whose investment portfolios are a small part of their entire wealth are in a better position to tolerate fluctuations in the value of their portfolios.
Knowing the answers to these questions forms the basis of your investment plan and will help you decide which investments and Funds are likely to give you the type of returns you are looking for.