One of the most successful investors of all time, Warren Buffet, said “Risk comes from not knowing what you are doing”. In other words, you should know ‘what you are doing’ before you invest.

Well, to know ‘what you are doing’ or ‘what you should do’, you need to look at two aspects of risk:

1. The risk associated with a product by understanding its probability of making negative return, i.e. product risk, and

2. The overall risk you can take as an investor, i.e., your risk tolerance level.

Product Risk

Having an answer to the first question can help you figure out the risk associated with a product. Risk is a measurable possibility of loss on an investment. It is not just the potential loss of returns, it is potential loss of the entire investment i.e. both principal and interest.

It is taken as a thumb rule that higher the risk associated with a product, higher the chances of earning better returns, and vice versa.

Let us understand this with an example. Equity is one of the highest risk assets, but it has also delivered higher returns in the long-term. In the past 15 years, equity markets have given a return of 15%. However, it has also slumped 13% in a single day. Other investment options such as fixed deposits and gold have managed to give returns of around 8% over the years with lesser volatility.

Thus, before investing, it is wise to evaluate the amount of returns variability and risk associated with a product.

Risk Tolerance

Now that you can assess product risk, it becomes imperative to know how much risk you can take as an investor without getting affected. And knowing the amount of risk that you can take is called Risk Tolerance. Basically, you should not get sleepless nights after investing in any product, as it may influence your thoughts and make you take wrong investment decisions. This is the reason why emotional quotient (EQ) is more important than intelligent quotient (IQ) in investing.

Here is a guide to select a right product based on your risk tolerance ability.

You are now ready to take a plunge into investing by selecting a right product based on your risk tolerance. But if you are new to investing, please consult your financial advisor to know the exact asset allocation that suits your risk profile.

You can assess your risk profile by our risk profiler on IndusSmart.