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Risk profilingis a process of evaluating the amount of risk one can safely tolerate with his or her investments. The outcome of a riskprofiling exercise helps an investment advisor shortlist theappropriate investment avenues for the reaching the required goal vis--vis the appetite for risk. For example, if an investor is nearing his or her retirement age, a prudent advisor would advise investment vehicles that have a moderate to low risk.

This is an essential step for recommending appropriate funds tailored to meet specificreturn objectives. It helps an investment advisor to outline the risks, its types and its potential affects.

Why Risk Profiling?

Being an integral part of the investment process, risk profiling strengthens the decision-making procedure. Itsuggests suitable investment classes for a particular individual. Hence, risk profiling improves the quality of advice and adds credibility and explanation to the investment decision.

Risk profiling varies from person to person and helps them take the right decision at the right time. In case one has limited resources and high liabilities, he should not participate in risky market vehicles. Equity investmentsmight not be the best avenue for a person who has to pay a huge EMI's for a loan, etc.

Other Side of the Story: Tactical Investing

There are strategic investors who invest for building long-term wealth. They prefer following an allocation pattern and earn reasonable returns across the market cycles. They continue to invest in equity even if the market falls.

Tactical investors on the other hand prefer to predict how different categories of assets are going to perform during a particular market condition. Tactical investing needs expertise and skill in reading market signals as well as ability to reallocate assets.

Various kinds of risk profiles are

  • Conservative
  • Moderate
  • Dynamic
  • Aggressive

Risk profiling, starts off with a set of question, to determine an investor's attitude to risk. The level of risk that the investor can embark on is estimated from the answers to the questionnaire.

On this basis, the advisor suggests asset allocation strategies that allow the investors to structure their portfolio.

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