Many people associated with the market have queries or are unaware regarding Risk Profiling including certain Investment Advisers. The Regulations for Investment Advisers clearly states that an Investment Adviser has to ensure that it carries out Risk Profiling of the investors in a systematic manner.
Further, a few months ago, SEBI came out with the Circular on December 27, 2019 titled “Measures to strengthen the conduct of Investment Advisers”, with an objective to strengthen the conduct of Investment Advisers, and to protect the interest of investors.
The Circular amongst other things it focused on proper risk profiling of clients by the Investment Advisers.
So now let us understand, what is Risk Profiling?
Risk Profiling is a process to evaluate the optimum level of investment risk a person is willing to take. Risk profiling takes into account multiple factors to assess your risk.
It helps in determining what kind of investor you are, what kind of returns you should expect from your investment and what combination of investment you should have.
There exists a mismatch between risk required and risk capacity, risk profiling helps to balance between it.
The main reason behind risk profiling is to determine asset allocation across different asset classes. However, there is no thumb rule for determining asset allocation.
Market does not move in same direction and is quite volatile, no one can predict market with 100% accuracy and this makes it necessary to invest in market as per your risk-taking capacity and here comes the need for a risk profiling. A person may be willing to take high risk but he may does not have the capacity to take high risk.
Usually risk profiling is done through set of questionnaires covering varied factors, it basically covers –
- Investment Objective
- Age
- Source of Income
- Time horizon
- Dependents
- Past experience
Without proper knowledge of the investor’s objective, time horizon, investment constraints, liquidity needs, and other factors, it is impossible to recommend suitable investments to them.
Every investment option is exposed to an inherent risk, and it should match with your risk appetite to have a proper asset allocation.
Risk and Return are positively correlated, means higher return requires higher level of risk. Without having proper risk profile, you may end up buying investment which may have more risk than your risk appetite and you may end up unsatisfied return generated by your investment.
One important point to remember is risk profile is not static and it changes over time depending upon your life cycle, income, tenure of investment and other factors. As the risk and return of a 20-year person completely differs from a retired 65-year-old.
Hence, it is important to assess your risk profile periodically.
Conclusion
The move of SEBI will not only help Investment advisers in assessing the risk appetite of investors before offering a product but will also ensure that they are being offered right product based on their risk capacity.
Disclaimer
The article here is personal opinion of writer and does not represent view of any regulatory authority. Further it is for informational purpose only. In case of any query feel free to connect us at [email protected]
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