For those of you who have been involved in the world of investment, you are certainly no stranger to the term risk profile. If you are just starting to invest, many suggest knowing your risk profile first before choosing a portfolio that is suitable and will be profitable for you.
By knowing your risk profile, you can determine what type of investment is suitable for you so that it can later provide benefits that align with your risk profile and investment goals while still giving you emotional peace of mind. So, what exactly is meant by the term risk profile? Read through this article to get a more detailed explanation about risk profiles.
Key Takeaways:
- Risk profile is an assessment of a person's willingness and ability to take a risk.
- In the world of investment, it is important to know a person's risk profile so that later they can determine what investment products are appropriate for their portfolio.
- There are 4 types of risk profiles in investing, namely very conservative, conservative, moderate, and aggressive risk profiles.
- There are two main components that affect the calculation of risk profiles, namely risk aversion and risk capacity.
Understanding Risk Profile
As cited from Kotaku, risk profile is an evaluation of a person's willingness and ability to take a risk. In the world of investment, this risk profile is used in decision-making to determine the appropriate investment asset allocation for your portfolio. In addition, risk profiles are also utilized by an organization or company when making a decision to reduce the potential for losses.
So, how do you determine the risk profile itself? A person's ability to take risks can be assessed by reviewing that individual's assets and liabilities. For example, someone with high assets and low liabilities will have a higher ability to take risks, and vice versa.
Someone who already has savings for various aspects such as insurance, pension funds, and so on usually has a higher ability to take risks compared to individuals whose entire income has been spent on daily needs. On some occasions, the willingness and ability to take risks do not match each other.
Benefits of Risk Profile
If you already know your own risk profile, there are certainly several benefits that you will experience as an investor. Referring to Kumparan, the following are the benefits of knowing your risk profile:
- Able to choose the type of investment that is suitable for your portfolio
- Able to consider the targets you want to achieve when choosing investments
- Manage investment portfolios well
- Able to formulate risk control strategy plans
- Investors are able to recognize the risks of each investment made
Types of Risk Profiles
According to Kumparan, there are several types of risk profile levels that investors need to know. These risk profile levels indicate the extent to which investors are able to tolerate the risks they will face.
Quoted from the book Bisa Investasi dengan Gaji < 5 Juta by Rina Dewi Lina, MM (2016), the following are the types of risk profiles:
1. Very Conservative
In the first type, an investor prioritizes income flow and liquidity because they fall into the very conservative risk profile type. Investors who have a conservative investment policy usually tend to choose low-risk investment products. Generally, their investment time frame plan is less than one year. The types of investment products suitable for very conservative investor types are savings accounts, deposits, or money market mutual funds.
2. Conservative
The second type is conservative. In this type, investors are generally more daring compared to the previous very conservative type. Although there is still a feeling of fear of losing the initial capital. Investment products suitable for conservative type investors are cash products, money markets, and fixed income. Generally, this type of investor has an investment time frame plan of approximately 1-3 years.
3. Moderate
The next type is moderate, where investors are fairly bold in taking higher risks. However, this type of investor will still be careful in managing the number of investment instruments they have. So it can be said that this type of investor is in the middle between other types. Suitable investment products are investment products that have a combination of several investment instruments such as stocks, bonds, and deposits like balanced mutual funds. The investment time frame undertaken usually ranges from 3-4 years.
4. Aggressive
The next type is investors with an aggressive type. This type is suitable for investors who dare to take high risks for every possibility that may occur. This type of investor always seeks higher growth potential on investment capital. The principle held by aggressive investors is no pain no gain, which means they dare to take high risks to obtain high returns as well. Suitable investment products are stock compositions for long-term investment.
How to Calculate Risk Profile?
In general, there are two important components in calculating risk profile, namely risk aversion and risk capacity. As cited from Pintu, the following is a more detailed explanation:
Risk Aversion
Risk aversion is the response given by investors psychologically and emotionally. There are some investors who are not too affected when experiencing losses and immediately focus on the next stage, but there are also investors who are easily affected psychologically when experiencing a loss. According to Klement and Miranda (2021), there are 3 factors that influence a person's risk aversion, namely genetics, the surrounding environment, and past experiences.
Risk Capacity
What is meant by risk capacity is a measure of how much an individual can withstand financial blows without losing their quality of life. There are 3 factors that can affect a person's risk capacity, namely time, resources and needs, as well as income.
So, in calculating the risk profile value, there are many aspects that can influence it. Everything depends on the attitude and experience of each individual whether they decide to dare to take high risks or continue to play it safe so as not to lose their initial capital.
Choose Investment Products that Match Your Risk Profile with BTN Prioritas
After understanding what risk profile is and its types, the next step is to choose what investment products are suitable for your risk profile. BTN Prioritas has two types of investment products, namely mutual funds and bonds. For example, if you fall into a conservative risk profile, you can choose the Fixed Income Fund Mutual Fund product which has a minimum investment composition of 80% in bonds and a maximum of 20% in stocks.
Visit our website to get more information.
