Risk: An underrated word in today's investment landscape
Subscribe to enjoy similar stories. Risk profiling is a mandatory exercise every investment advisor must undertake before giving investment advice. Despite its importance, the Securities and Exchange Board of India (SEBI) has not defined a specific methodology, leaving advisors with the flexibility to approach this task in various ways.
Some rely on standard basic questionnaires, while others delve deeper, employing psychometric analysis to understand the investor's behaviour and risk attitude. Regardless of the method, this exercise is crucial, as it leads to a recommended and potentially suitable asset allocation for the client's long-term investment strategy. Asset allocation is a cornerstone of any robust investment plan.
However, the relevance of this exercise diminishes if an investor exclusively seeks equity investments or if the advisor focuses solely on stock recommendations. It's also important to recognize that answering a set of questions might not fully capture an investor's risk tolerance. True understanding develops over time, particularly when the advisor and the investor have experienced different market cycles together.
These shared experiences reveal deeper insights into risk perception and lead to a mutually accepted asset allocation. Observing reactions during market downturns and upswings is essential. For instance, investors who were conservative during the covid-19 crisis have now turned aggressive, seeking maximum equity exposure.
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