Risk Assessment Before Investing
One week back I have joined a Indian Mutual Fund Group on Facebook to know what people think about the Mutual Fund in India. The group has over 100K members and usually there are 10-20 posts about Mutual Fund alone. People ask all sorts of questions like which mutual fund is good, where to invest and others. But I can see almost 5 posts everyday where people ask to review their portfolio for a longer duration like 10-15 years.
What I had make out that people want to get wealthy by investing into the Mutual Fund and that is a good sign overall. But what I have seen that almost everyone has similar kind of portfolio where all the funds are directly related to equity. Now we know that for a longer duration equity will always is beneficial as because you can easily get higher returns.
But lets say you need money 10 years down the line, all in equity and then something like Covid happens where your whole portfolio is down by 50% and you want to take some money out of it but you cant because your total portfolio is down to that extent where not only your profit but your invested amount is gone. What to do in this scenario. So I usually ask the same question to every so called Financial Planner that what should the investor needs to consider before investing.
Though there a a lot of things to keep in mind before investing like the financial goals, the duration, the asset allocation and then which financial instrument to choose to invest. In that group all these questions are answered, but what is not answered is your risk appetite. What will happen if you lose 50% of your money because investing in All equity mutual fund is risky option. If he/she is a conservative investor like me, that investor does not have the courage to digest the continuous losses the investment is making. To give you an idea on March 2020 my equity investment was down 40 percent.
When I have started investing using Niyo Money (Where you can actually create the Goal), I first have taken risk appetite test that means what is my risk taking ability. If it is High, Medium or Low. If it is High then I can go with 80% equity, if its medium then 60% otherwise 40% for long duration goals. Because I know that it was always nice to plan your investment based on your ability.
So coming back to the group where everyone wants to build wealth but everyone forgets one thing is to safeguard your capital too. What we should actually be doing before investment is to check our current net worth, income and savings, future earning capacity and duration of financial goals and then based on that we have to access the risk before determining the asset allocation and its never going to be 100% equity.
Now people can argue that we have seen historic data, equity always gives more than 10% year to year return for 10 years or more. Yes it is 100% true, but who knows the future. I am not saying don't invest in equity. You should always invest in equity but what you should actually do is to reduce the equity percentage from 100% to say 70% or 80% and keep that 20%-30% percent in debt and when there is a blood bath like 2020 in the market you can easily move your debt into equity so that your overall gain will be much higher.
What I wanted to tell all investors out there is to understand the whole concept of financial planning and then decide what is the right investment for you after taking the risk assessment.
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