How to measure Your risk tolerance

Measuring the risk profile involves a scientific approach. Typically, you need to respond to a set of questionnaire consisting of multiple choice questions. You are supposed to choose answers which closely reflect your attitude towards money.

Risk tolerance is depended on a number of variables such as the investors’ age, her current lifestyle, emotional temperament and investment experience. 

It is measured under three parameters:

·         Attitude to risk: This measures the understanding of the concept of risk and how it applies to life and financial matters.

·         Risk tolerance: This is to understand how comfortable you are with volatility.

·         Capacity of risk: This is the level of financial risk you can afford to take.

Here are a set of questions which you can ask yourself to assess your  risk profile.

1.Which of the following best describes your current stage of life?

·         Employed and independent.         ( 4 points)

·         Employed with one dependent.    (3 points)

·         Employed with two dependents.  (2 Points)

·         Employed with more than two dependents. (1 Point)

2. How secure is your current and future income from sources such as salary, pensions or other investments?

·         Not secure               (1 Point)

·         Somewhat secure   (2 Points)

·         Secured                    (3 Points)

·         Very secure              (4 Points)

3. When you think of the word "risk" which of the following words come to your mind first?

·         Danger          (1 Point)

·         Uncertainty   (2 Points)

·         Opportunity  (3 Points)

·         Thrill               (4 Points)

4. On the whole, which of the following best describes your investment objective?

·         Capital preservation                                                 (1 Point)

·         A regular flow of stable income                             (2 Points)

·         A combination of income and capital growth      (3 Points)

·         Achieve substantial long term capital growth     (4 Points)

5. Which of these investment plans would you choose?

·         Keep money in savings accounts and the remaining in fixed deposits with guaranteed return. (1 Point)

·         Be well diversified i.e. have a mixture of equity, bonds and cash. (2 Points)

·         Simply invest 50% in equity and the balance in bonds.                     (3 points)  

·         Go for the highest return with the highest risk, safety can be compromised. (4 Points)

6. What will you do with your investments if the value drops over a period of time due to market fluctuation?

·         I do not wish to hold on to any investments at a loss and will sell the investments immediately even if the drop in value is small  (1 Point)

·         I will sell the investments if the drop in value is large (2 Points)

·         I will not sell the investments regardless of the drop in value as I would like to wait for the investment to recover in value (3 Points)

·         I will not sell the investments regardless of the drop in value and will buy more to capitalize on the drop in price.  (4 Points)

7. Investment such as cash and FDs come with fixed returns and inflation may cause the purchasing power of such investments to decrease. Other types of investments such as stocks do not come with guaranteed returns. In the short term, their value may even fall below the purchasing price. However, over the long term, the value of stocks may increase by more than the rate of inflation. So, what is more important to you?

·         The value of your investments does not fall (1 Point)

·         It retains its purchasing power                        (2 Points) 

8. Investments can go up or down in value and experts often say you should be prepared to weather a downturn. By how much could the total value of all your investments go down before you would begin to feel uncomfortable?

·         Any fall would make me feel uncomfortable. (1 Point)

·         20%.                                                                        (2 Points)

·         50%.                                                                        (3 Points)

·         More than 50%                                                      (4 Points)

9.Suppose five years ago, you invested in a company which did not give expected returns and the price of the stock dropped drastically. Given your past bad experience, would you invest in the same company if it is restructured with new management?

·         Yes  

·         No     

10. What will you do if you win a lottery of Rs. 20 lakh?

·         Use all the money without saving  (1 Point)

·         Deposit the money in FDs                (2 Points)

·         Invest 40% in liquid and the remaining  in equities  (3 Points)

·         Invest all the money in equities                                   (4 Points)

11. You have won Rs. 10 lakh in a quiz show. Now, you can either quit or play more. What would you do?

·         This Rs.10 lakh was luck. I would take it and quit.  (1 Point)

·         Take a 50:50 chance of making Rs.20 lakh or zero. (2 Points)

·         Take a 20:80 chance of winning Rs.25 lakh or zero. (3 Points)

·         Take a 5% chance of making Rs.1 crore or nothing.  (4 Points) 

After collecting the responses, it is time for you to determine the risk tolerance based on the scores from the answers.

Investor Profile	Score	Description
a.    Conservative	0 -18 points	She is a conservative investor who does not wish to take any investment risk. The priority is to safeguard your investment capital.
a.    Balanced	19-40 points	She is a balanced investor with some understanding of market behaviour. She is prepared to take some short term risk to get longer term capital growth.
a.    Moderately High	41-65 points	She is most interested in maximising long term capital growth, although does not wish to make unbalanced investment decisions. She takes calculative risks for long term returns.
a.    Aggressive	66+ points	She is an experienced or sophisticated investor. She is an aggressive investor with a strong bias towards investments with high growth potential and is willing to accept higher performance fluctuations for long term returns.

The above table does not apply to Q.9