What is risk profiling in Mutual Funds?

Risk profiling helps you to choose the right mutual fund schemes that match your financial goals, time horizon, and risk preferences.
What is risk profiling?
4 mins
23 March 2024

Risk profiling is a process of assessing your risk appetite, risk tolerance, and risk capacity before investing in mutual funds. Risk profiling helps you to choose the right mutual fund schemes that match your financial goals, time horizon, and risk preferences.

Types of risk profiles

There are different types of risk profiles based on your personality, behaviour, and attitude towards risk. Some of the common risk profiles are:

  • Conservative: You are a conservative investor if you prefer safety and stability over high returns. You are willing to accept low or moderate returns in exchange for low or minimal risk. You are suitable for debt funds, liquid funds, or hybrid funds with low equity exposure.
  • Moderate: You are a moderate investor if you seek a balance between risk and return. You are ready to take some risk for higher returns, but not too much. You are suitable for balanced funds, dynamic asset allocation funds, or hybrid funds with moderate equity exposure.
  • Aggressive: You are an aggressive investor if you have a high risk appetite and a long-term investment horizon. You are willing to take high risk for high returns. You are suitable for equity funds, sectoral funds, or thematic funds with high equity exposure.

How fund advisors can help

Fund advisors can help you with risk profiling in mutual funds in the following ways:

  • Assess your risk profile: Fund advisors can use various tools and methods to assess your risk profile based on your age, income, expenses, liabilities, goals, and preferences. They can also help you to understand the implications of your risk profile on your investment decisions.
  • Recommend suitable funds: Fund advisors can recommend suitable mutual fund schemes based on your risk profile and your financial goals. They can help you to diversify your portfolio across different asset classes, sectors, and styles to reduce your overall risk and enhance your returns.
  • Review and rebalance your portfolio: Fund advisors can help you to review and rebalance your portfolio periodically to ensure that it is aligned with your risk profile and your financial goals. They can help you to switch, redeem, or invest in different funds based on the market conditions and your changing needs.

Did you know? You can also get an estimate of the future value of your mutual fund investments by using the Bajaj Finserv SIP Calculator, eventually helping you to make informed decisions.

How to use risk profiling

You can use risk profiling in mutual funds to make better investment decisions. Here are some steps to follow:

  • Identify your financial goals: You should identify your financial goals and prioritise them according to their importance, urgency, and duration. You should also estimate the amount of money required to achieve each goal and the expected rate of return.
  • Determine your risk profile: You should determine your risk profile based on your risk appetite, risk tolerance, and risk capacity. You should also consider your life stage, income level, and financial obligations.
  • Choose suitable funds: You should choose suitable mutual fund schemes that match your risk profile and your financial goals. You should also consider the fund’s performance, expense ratio, exit load, and tax implications.
  • Monitor and modify your portfolio: You should monitor and modify your portfolio regularly to ensure that it is in sync with your risk profile and your financial goals. You should also review your risk profile periodically to account for any changes in your personal or financial situation.

Measuring risk profiles

There are different ways of measuring risk profiles in mutual funds. Some of the common methods are:

  • Risk-reward ratio: This is a ratio that compares the expected return of a fund with the expected risk. A higher risk-reward ratio indicates a higher potential return for a given level of risk. A lower risk-reward ratio indicates a lower potential return for a given level of risk.
  • Standard deviation: This is a measure of the volatility or variability of the returns of a fund. A higher standard deviation indicates a higher fluctuation in the returns of a fund. A lower standard deviation indicates a lower fluctuation in the returns of a fund.
  • Beta: This is a measure of the sensitivity of the returns of a fund to the returns of the market or a benchmark. A beta of 1 indicates that the fund moves in tandem with the market or the benchmark. A beta of more than 1 indicates that the fund is more volatile than the market or the benchmark. A beta of less than 1 indicates that the fund is less volatile than the market or the benchmark.
  • Sharpe ratio: This is a measure of the excess return of a fund per unit of risk. A higher Sharpe ratio indicates a higher return for a given level of risk. A lower Sharpe ratio indicates a lower return for a given level of risk.

Risk profiling is an essential step in investing in mutual funds. It helps you to understand your risk preferences and choose the right mutual fund schemes that suit your financial goals and risk profile. You can use various tools and methods to assess and measure your risk profile and seek the help of fund advisors to make informed investment decisions.

You can invest in 1000+ mutual fund schemes on the Bajaj Finserv Mutual Funds Platform today. Additionally, you can also compare the mutual fund returns of different schemes on the platform to help you make your decision easier.

Frequently asked questions

What are the three components of a risk profile?

The three components of a mutual fund risk profile are: risk appetite, risk tolerance, and risk capacity.

What is the difference between risk profile and risk assessment?

The difference between risk profile and risk assessment is that risk profile is a personal attribute that reflects your risk preferences, while risk assessment is a process that evaluates the potential risk and return of an investment.

What is a risk profile questionnaire?

A risk profile questionnaire is a type of risk assessment tool that helps you to identify your risk profile and suggest suitable asset allocation for your financial goals.