A Study of Categorization of investors in different Risk-Profile using
tools developed by Aditya Birla Money Mart Ltd.
Maj...
CERTIFICATE
This is to certify that the Major Research Project Report entitled “A Study of
Categorization of investors in ...
DECLARATION
I, Himanshu Singh, hereby declare that the Project Report entitled “A Study of
Categorization of investors in ...
ACKNOWLEDGEMENT
I would like to acknowledge my project guide Prof. Harsh Ramgir for guiding me in my
research project. Her...
INDEX
CHAPTERS PAGE NO.
Chapter 1
Introduction
7 - 21
Chapter 2
Review of literature
22 - 23
Chapter 3
Rationale of the st...
Topic of MRP
A Study of Categorization of investors in different ‘Risk-Profile ‘using
tools developed by Aditya Birla Mone...
CHAPTER 1
7
INTRODUCTION
Today, in this modern world, investment becomes little bit easy by taking right
investment strategy rather th...
What Is Risk?
In order to differentiate between risk tolerance and risk perception, we must first define
risk. Risk is rea...
Three key components comprise an individual’s true risk profile:
• Psychological willingness to take risk, sometimes calle...
What does risk profiling include?
Typically, risk profiling involves a study of three broad aspects of a client. Risk capa...
Expected Utility:
The level of satisfaction an investor will realize, on average, when making an economic
decision where t...
Economic/political
Economic and political factors play an important role in the performance of investment
markets. Economi...
Behavioural aspects of risk attitude
The complexities of measuring investment risk attitude require that the questionnaire...
Demographic factors previously proposed and researched as possible drivers of
investor risk tolerance include age, gender,...
Risk Tolerance in the Financial Planning Process
There is a value in knowing a client’s financial risk tolerance in its ow...
Ways to develop client risk profile
Starting conversations
Asking your client to complete a risk profiling questionnaire s...
Risk profiling method
We have to:
1) Estimate the financial risk-taking capacity.
2) Understand the psychological risk tol...
Different types of Risk – Profiles
Risk Profile Investment Style
Wealth Guard
(Risk Averse)
Your primary investment goal i...
Description of investor risk profiles
Wealth Guard (Risk Averse)
In general, low risk investors prefer knowing that their ...
Wealth Enhancer (Growth)
In general, mid-high risk investors are willing to take on investment risk and understand
the nat...
CHAPTER 2
22
REVIEW OF LITERARURE
Terrence A. Hallahana, Robert W. Faffb, and Michael D. McKenziea analyze a large
database of psychome...
CHAPTER 3
24
RATIONALE OF THE STUDY
The rationale behind the study is:
• To make the individuals aware of their risk profile.
• To anal...
OBJECTIVES OF THE STUDY
• The objective of the study is to perform “Risk profiling” of the individuals across
various segm...
CHAPTER 4
27
RESEARCH METHODOLOGY
NATURE OF THE STUDY
The study is exploratory in nature.
It includes investigation into a problem or s...
CHAPTER 5
29
DATA ANALYSIS AND INTERPRETATION
The kinds of information we collect from 50 clients through questionnaire are as
follows:...
• 10 respondents were found to be single.
• 2 respondents were found to be single with dependent parents.
• 1 respondent w...
• 8 respondents were found to have basic knowledge and little experience with
investment.
• 2 respondents were found to ha...
• 8 respondents were found to protect capital and earn regular income.
Investing means putting your money to work for you....
• 15 respondents mainly aggressive stock, high-yield debt funds, (small and
midcap stocks and income funds) private equity...
• 10 respondents have a separate provision for such expenses.
• 3 respondents have no separate provision for such expenses...
• 21 respondents were found who plan to start withdrawing money from their
investment for major needs between 3 and 5 year...
• 1 respondent have not taken any insurance coverage.
8) To meet foreseen and unforeseen circumstances you need to keep…. ...
An instrument that can be converted into cash quickly and with minimal impact to the
price received.
Liquid instruments ar...
• 3 prospects are prepared to hold their investment before liquidating it up to 3
years or more.
• 1 prospect are prepared...
• 8 prospects willing to withstand minor fluctuations in my portfolio but prefer to
be invested in less risky investments....
• 10 respondents are most comfortable in investing in portfolio with 7% indicative
return and 2.5% risk volatility.
• 9 re...
• 9 respondents expect Inflation rate plus 11- 15% p.a. return from your
Investments.
• 4 respondents expect Inflation rat...
• 18 respondents were found to sell all holdings in that stock.
• 7 respondents were found to buy more of the stock.
• 3 r...
moves against the investor, his or her loss is much greater than it would've been if the
investment had not been leveraged...
• 16 respondents were found to be at growth state that is 32% of the total
respondents are falling is “Wealth Enhancer” ri...
Suppose if indicative return is 6%, so in that case, best return will be 6%, worst return
will be 6% and here risk volatil...
CHAPTER 6
47
FINDINGS OF THE SYUDY
• A mostly respondent belongs to mature class family.
• Mostly respondents have sufficient knowledge...
• Mostly risk volatility faced by respondent is 10% and in that case, worst return
will be -10%, indicative return is 10% ...
RECOMMENDATIONS
• Investor should have sufficient knowledge about financial market before taking
investment decisions so t...
• Investor should have sufficient provisions before investment so that they can
cope up with the losses, if any, arises du...
CHAPTER 7
FUTURE SCOPE OF THE STUDY
• This research has importance to financial advisors. Advisors should understand
that ...
clients will grasp the concept more readily than others. Obviously, the ability of
the client to grasp the concept of risk...
CONCLUSION
Know-the-client has always been a cornerstone of financial Planning and knowing the
client’s risk tolerance is ...
CHAPTER 8
55
ANNEXURE 1
BIBLIOGRAPHY / REFERENCES
• www.adityabirlamoney.com
• www.moneycontrol.com
• www.authorstream.com
• www.manage...
• International Journal of Risk Management, Volume 1 Number 1(Jan-Jun 2011)
• Financial Planning Journal (Jul–Sep 2009)
• ...
c) Young family (6 marks)
d) Mature Family (8 marks)
e) Nearing retirement (4 marks)
f) Retired (2 marks)
2) How familiar ...
5) Have you planned for major life stage expenses like your child’s
Education, marriage, purchase of house, medical/hospit...
e) None of my investments (10
marks)
9) If your investment turns bad due to global economic melt-down, for
how long would ...
Indicative
Return
Best
Return
Worst
Return
Risk
Volatilit
y
a) 6% 6% 6% Nil (2 marks)
b) 7% 12% 2% 2.50% (4 marks)
c) 10% ...
On the basis of above information collected, we gave them certain marks and calculate
total score of it and finally we cat...
The model portfolio is a bird’s eye view of risk-return profiles of different individual
investors who belong to different...
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A study of categorization of investors into different risk profles

  1. 1. A Study of Categorization of investors in different Risk-Profile using tools developed by Aditya Birla Money Mart Ltd. Major Research Project Submitted towards partial fulfillment of Master of Business Administration Awarded by Devi Ahilya VishwaVidhyalaya, Indore Guided By: Submitted By: Prof. Harsh Ramgir Mr. Himanshu Singh MBA IV Semester Roll.No. 11706555 Faculty of Management, Acropolis Technical Campus, Indore 1
  2. 2. CERTIFICATE This is to certify that the Major Research Project Report entitled “A Study of Categorization of investors in different ‘Risk-Profile’ using tools developed by Aditya Birla Money Mart Ltd.”, which is being submitted herewith for partial fulfillment of requirement for award of the degree of Master of Business Administration (Full time) by Devi Ahilya VishwaVidhyalaya (DAVV), Indore is successfully completed by Himanshu Singh under my supervision and guidance. Date: Signature of Guide Name of Guide Prof. Harsh Ramgir Countersigned: Internal Examiner External examiner 2
  3. 3. DECLARATION I, Himanshu Singh, hereby declare that the Project Report entitled “A Study of Categorization of investors in different ‘Risk-Profile’ using tools developed by Aditya Birla Money Mart Ltd.” is an authentic work done by me under the supervision of Prof. Harsh Ramgir. The Study was undertaken as a part of the course curriculum of MBA IV Semester (Full Time) of Faculty of Management, Acropolis Technical Campus, Indore affiliated to Devi Ahilya Vishwavidyalya (DAVV), Indore. This project work does not contain any part of any work which has been submitted for the award of any degree either in this university or in any other University/ Deemed University without proper citation. Date: Himanshu Singh MBA (IVth Semester) 3
  4. 4. ACKNOWLEDGEMENT I would like to acknowledge my project guide Prof. Harsh Ramgir for guiding me in my research project. Her/his encouragement, time and effort are greatly appreciated. I would like to thank all the respondents who offered their opinions and suggestions for the survey that was conducted by me and all those who supported me directly or indirectly in completing my Major Research Project. Date: Himanshu Singh M.B.A. – IV Semester 4
  5. 5. INDEX CHAPTERS PAGE NO. Chapter 1 Introduction 7 - 21 Chapter 2 Review of literature 22 - 23 Chapter 3 Rationale of the study Objective of the study 24 - 26 Chapter 4 Research Methodology 27 - 28 Chapter 5 Data analysis and interpretation Discussion 29 - 46 Chapter 6 Findings of the study Limitations of the study Recommendations 47 - 50 Chapter 7 Future scope of the study Conclusion 51 - 53 Chapter 8 Annexure 1 – Bibliography/ References Annexure 2 – Appendices 54 - 60 5
  6. 6. Topic of MRP A Study of Categorization of investors in different ‘Risk-Profile ‘using tools developed by Aditya Birla Money Mart Ltd. 6
  7. 7. CHAPTER 1 7
  8. 8. INTRODUCTION Today, in this modern world, investment becomes little bit easy by taking right investment strategy rather than traditionally where we have to work hard, but today by making investment in smarter manner, we can earn easily. But for taking right decisions, the most important thing is to first of all understanding of the risk. Risk is really the uncertainty that exists as to what the eventual outcome will be. Risk arises in any decision where there is some doubt about at least one of the possible outcomes. The risk inherent in any given situation will depend on the range of possible outcomes and the likelihood and value of each particular outcome. Thus, in a financial context, risk is basically the difference of expected returns and the actual returns. In order to analyse the risk appetite of investors, the best way is to evaluate their risk profiles by their capacity of taking risk which is basically their risk tolerance. Risk Profiling basically determines the Risk Tolerance of various individuals. Risk profiling is basically done to understand the nature of investors in terms of their desired returns of investors, the level of risk they are comfortable with, and so on. Because there are many investors in the society who are rich but they usually go in loss because they don’t know their risk profiles that is the acceptable level of risk or simply their risk tolerance. So, risk profiling provides them a direction suitable for them to best utilizes their money which will result into their wealth maximization by taking reduced level of risk. Risk profiling is user is user friendly way to gain a more deep understanding of client’s financial risk tolerance – attitudes, values, motives, preferences, etc. In financial markets, the risk profile of an individual indicates his ability to take risk while investing. It is one of the important variables that a financial planner will focus on before recommending an investment strategy to an investor. Risk profile categorises the individuals in various segments like conservative, moderate, or aggressive. Once the financial planner decides the risk profile of an individual, he suggests him a suitable financial plan, taking into account his financial goals and the time horizon on hand. The financial plan undergoes changes with the changes in the risk attitudes of the investors. Risk profiling is necessary to understand because your risk profile reflects your perception of the acceptable trade off between risk and the required return for bearing any investment risk. 8
  9. 9. What Is Risk? In order to differentiate between risk tolerance and risk perception, we must first define risk. Risk is really the uncertainty that exists as to what the eventual outcome will be. Risk arises in any decision where there is some doubt about at least one of the possible outcomes. The risk inherent in any given situation will depend on the range of possible outcomes and the likelihood and value of each particular outcome. Thus, in a financial context, risk tolerance is the amount of risk an individual chooses when making a financial decision. The concept of risk is sometimes differentiated from the concept of “uncertainty” or “ambiguity,” the difference being that under “risk” the probabilities are known, whereas in the case of uncertainty/ambiguity, the probabilities associated with the various outcomes is unknown. In certain instances, such as games of chance, the risk is easy to define. Reasons for Undertaking a Risk At the most basic level then, a decision under risk is a function of - (1) The perceived probabilities of the alternatives, (2) The perceived consequences, and (3) The psychological propensity of the individual to undertake risk. In other words, risk taking is determined by how much risk the observer believes there exists in the task and whether he or she is willing to act at that level of risk. In other words, risk taking is determined by how much risk the observer believes there exists in the task and whether he or she is willing to act at that level of risk. Risk Profile An evaluation of an individual or organization's willingness to take risks, as well as the threats to which an organization is exposed. A risk profile identifies: • The acceptable level of risk an individual or corporation is prepared to accept. A corporation's risk profile attempts to determine how the corporation's willingness to take risk (or aversion to risk) will affect its overall decision- making strategy. • The risks and threats faced by an organization. • The risk profile may include the probability of resulting negative effects, and an outline of the potential costs and level of disruption for each risk. 9
  10. 10. Three key components comprise an individual’s true risk profile: • Psychological willingness to take risk, sometimes called ‘risk attitude’ • Financial ability to take risk, or ‘risk capacity’. • Need to take risk, including the need to accept risk to meet an objective, avoid falling short of a goal or having wealth eroded by inflation. 10
  11. 11. What does risk profiling include? Typically, risk profiling involves a study of three broad aspects of a client. Risk capacity wherein the planner takes a look at the client’s finances, her balance sheet, net worth, income inflows and so on. It shows how much financial risk the client can take. Then comes risk tolerance. This shows how much risk the client is willing to take. This is more of a psychological evaluation and something that the planner must ascertain using her own intuitive skills, observation and understanding of the client’s mindset. Lastly, there is risk required. This means a study of the client’s financial goals and the time horizon—and therefore risk required to reach those goals. Risk Profiling basically determines the Risk Tolerance of various individuals. Risk Tolerance can be defined as the extent to which a person chooses to risk experiencing a less favourable outcome in the pursuit of a more favourable outcome. Risk Tolerance The degree to which an investor is willing and able to accept the possibility of an uncertain outcome to an economic decision. A measure of risk tolerance is useful in summarizing an investor's perception about the tradeoffs between risk and the compensation required for bearing risk. While there is some evidence of generalized risk taking, there is stronger evidence of consistency within, but not between facets. Financial risk tolerance involves perceptions about how confident people are in their ability to make good financial decisions, their views about borrowing money, and how much of a risk in terms of financial loss they believe they could accept in achieving financial gains in the longer term. Because of the complexity of the concept of risk tolerance, its measurement is also viewed as not an exact science. Risk tolerance is a complex psychological concept that is a key feature of financial attitudes and planning. Risk tolerance is the level of risk that an individual believes he or she is willing to accept. It is important to note that risk tolerance is a complex attitude, and like any attitude, it has multiple levels of interpretation. 11
  12. 12. Expected Utility: The level of satisfaction an investor will realize, on average, when making an economic decision where the ultimate resolution is unknown. Calculated as the mathematical average of the utility levels associated with each possible outcome of the investment, where the probabilities of the outcomes are used as the weights. Technically-speaking, ‘risk’ means the possibility of a number of different outcomes resulting from a given action. For example, before you flip the coin you know the result could be heads, tails or land on its edge. After you toss the coin, one of the three outcomes will occur. Investment academics usually identify risk as the volatility associated with the prices and/or returns of investments. However, we believe this approach is much too narrow for financial advisers to use in their practice. This is because clients do not think in terms of narrow mathematical terms. Indeed, clients often think of risk as the prospect of an undesirable outcome, such as a financial loss or not meeting an investment objective. Risks that clients face - Inflation Inflation is like a stealth tax eating away at the value of money. Clients may not see a smaller cash balance in their accounts, but they will definitely lose buying power. In other words, the amount that they can purchase with each pound in their pockets slowly erodes over time. Investors need to understand that some savings vehicles fail to pay a return that beats inflation, especially after tax is deducted. So even if they reinvest every penny of interest, the real purchasing power of their savings could fall. Shortfall This means the risk of failing to meet a long-term investment goal. This could occur if an investor didn’t take on enough risk to get the potentially higher rewards. On the other hand, they could also be exposed to shortfall risk if they invest in too many high-risk assets causing their portfolio to lose value at the wrong time. The relationship between risks and rewards needs careful explanation to ensure that investors understand how you are structuring their portfolios through time. The myriad of risks that can affect a client’s investment portfolio can be daunting. But shortfall risk together with inflation risk highlight the need to invest to meet long-term goals. 12
  13. 13. Economic/political Economic and political factors play an important role in the performance of investment markets. Economic factors include economic growth, inflation, employment, interest rates and business sentiment. Political risk includes changes in government, political uncertainty and international conflicts. A key feature of these risks is the apparent inability of even the most skilled economists and political scientists to predict them. You, as the adviser, have a key role in explaining that these risks are unpredictable and in structuring portfolios in such a way as to help manage the impact these risks can have. Broad market Individual markets, whether equities, bonds or even cash, are exposed to a variety of factors that can lead whole markets, or even most markets, to decline together. We have seen this over the last decade, most markedly during the recent global financial crisis. 13
  14. 14. Behavioural aspects of risk attitude The complexities of measuring investment risk attitude require that the questionnaire address a number of interrelated factors – Knowledge Individuals with more financial and investment knowledge are generally more willing to accept investment risk. Knowledgeable individuals often know that they will need to take at least some risk to generate higher returns. Short-term fluctuations in the values of investments need not matter for investors with longer-term horizons. Comfort with risk Some individuals have psychological traits that allow them to accept taking risk. These individuals typically see risk as involving a ‘thrill’ or ‘opportunity’ rather than as a ‘danger’ or a ‘loss’. Questions addressing risk comfort levels often involve individuals choosing among alternative courses of action relating to saving decisions, or simply stating their comfort level with risk. Investment choice Preferences for different kinds of investments can also help to gauge risk attitude, for example, the safety of a bank account versus the risk/return potential of the stock market. However, questions of this nature need to avoid using financial jargon to ensure that clients truly understand the questions asked. Regret This negative emotion arises from making the wrong decision. Individuals who are particularly prone to regret tend to try to make decisions that are less likely to cause it. For example, they might engage in regret avoidance. 14
  15. 15. Demographic factors previously proposed and researched as possible drivers of investor risk tolerance include age, gender, marital status, number of dependents, education (or investment knowledge), income, and wealth. Age Intuitively, most financial advisors and researchers would hypothesize that age and risk tolerance are negatively related. Gender It has long been assumed that gender was significant to risk tolerance. Specifically, that men are more tolerant of risk than Marital Status and Dependents Financial advisors tend to believe that marital status affects risk tolerance. The married couple is more apt to have greater financial responsibilities and the presence of dependents, thus less risk tolerance. Married couples may also face more social risk, which can be described as the loss of esteem due to investment failure. Married couples with two incomes, however, may have greater risk tolerance driven by a larger degree of risk capacity Education Many studies have found a positive relationship between risk tolerance and formal levels of education. Income and Wealth Income and wealth are regularly believed to have a positive relationship to risk tolerance, higher income or wealth level provides an individual greater capacity to incur risk. Also, it is important to distinguish between absolute and relative risk tolerance. Researchers generally believe that the absolute amount of income or wealth invested in risky assets is a positive function of income or wealth. 15
  16. 16. Risk Tolerance in the Financial Planning Process There is a value in knowing a client’s financial risk tolerance in its own right that goes beyond just the legal obligation. In the world of uncertainty and ambiguity that is the clients’ present circumstances and future expectations, a psychometric risk tolerance assessment is a firm foundation, once accepted as correct by the client, to explore the planning options. The financial planning process almost invariably involves a series of trade-off decisions which can only be made meaningfully when the elements involved in the trade-off are known with reliable accuracy. For example, more often than not consumers need to take more risk than they would prefer to achieve their initial goals. They simply do not have sufficient present or prospective savings to fund their lives as they would wish to live them. Risk tolerance is one of the three key risk-related inputs to a portfolio recommendation - the other two being the risk an individual needs to take to achieve their goals (risk required) and the crystallised risk an individual could accept without changing their life goals (risk capacity). 16
  17. 17. Ways to develop client risk profile Starting conversations Asking your client to complete a risk profiling questionnaire should mark the beginning of a conversation with them about risk. You can use the generalised output to move the conversation onto deep and critical issues in the ‘know your client’ process. Only by having a thorough and carefully structured conversation, as part of a systematic approach to investment advice, can advisers understand a given client’s true investment risk profile. ‘Willingness’ is just the beginning A client’s ‘willingness’ to take risk, as measured by a questionnaire for example, is only a small part of a client’s full and true risk profile. Willingness, or ‘risk attitude’, on the other hand, relates to psychology, rather than to financial circumstances. Some individuals find the prospect of investment volatility and the chance of losses distressing. Others are more relaxed about those issues. Financial advisers should try to fully understand the psychological willingness of each client to take risk. This is what risk profiling questionnaires focus on. Ability Ability to take risk relates to financial circumstances and investment goals. Generally speaking, the higher the level of wealth relative to liabilities, and the longer the investment horizon, then the greater the ability to take risk. The financial planning process should consider all of these issues carefully. Need The need to take risk is the third component of a true client risk profile. Willingness and ability need to be evaluated in the context of an individual’s need to take risk to achieve a goal. If they have a very low risk profile with a very demanding investment objective. 17
  18. 18. Risk profiling method We have to: 1) Estimate the financial risk-taking capacity. 2) Understand the psychological risk tolerance level of the individual End result of risk profiling 18
  19. 19. Different types of Risk – Profiles Risk Profile Investment Style Wealth Guard (Risk Averse) Your primary investment goal is capital protection. You require stable growth and/or a high level of income, and access to your investment within 3 years. Wealth Keeper (Conservative) Your primary investment goal is capital protection. Investors in this risk profile require fairly stable growth and/or a moderate level of income. Your investment term is 3 years or more. Wealth Builder (Balanced) Your primary investment goal is capital growth. You can tolerate some fluctuations in the value of your investment in the anticipation of a higher return. You don't require an income and you are prepared to invest for 5 years or more. Wealth Enhancer (Growth) Your primary investment goal is capital growth. Investors in this risk profile can tolerate a fair level of fluctuations in the value of your investment in anticipation of possible higher returns. You don't require an income and you are prepared to invest for 5 to 10 years. Wealth Multiplier (Aggressive) Our primary investment goal is long-term capital growth. You can tolerate substantial fluctuations in the value of your investment in the short-term in anticipation of the highest possible return over a period of 10 years or more. 19
  20. 20. Description of investor risk profiles Wealth Guard (Risk Averse) In general, low risk investors prefer knowing that their capital is safe and they’re not comfortable investing in equities. They would rather keep their money in the bank. Low risk investors are unlikely to have much experience of investment beyond bank accounts. They will usually suffer from severe regret if their decisions turn out badly. Low risk investors with time horizons of ten years or more typically have portfolios with a majority of bonds and cash, with little exposure to equities or other higher risk investments. Low risk investors need to understand that their caution can mean that their investments may not keep pace with inflation, or that may fall short of their investment goal. Wealth Keeper (Conservative) In general, low-mid risk investors would prefer not to take risk with their investments, but they can be persuaded to do so to a limited extent. They would prefer to keep their money in the bank, but they may realise that other investments might be better over longer term. Low-mid risk investors may have some limited experience of investment products, but will be more familiar with bank accounts than other types of investments. Low-mid risk investors can often suffer regret when decisions turn out badly. Low-mid risk Wealth Builder (Balanced) In general, mid risk investors understand that they have to take investment risk to meet their long-term goals. They’re often more willing to take risk with at least part of their available assets. Mid-risk investors may have some experience of investment, including investing in products containing higher risk assets such as equities and bonds. They can usually make up their minds on financial matters relatively quickly, but they still suffer from some feelings of regret when their decisions turn out badly. Mid risk investors with time horizons of ten years or more typically have portfolios with a mix of higher risk investments such as equities and lower risk investments such as bonds and cash. 20
  21. 21. Wealth Enhancer (Growth) In general, mid-high risk investors are willing to take on investment risk and understand the nature of the long-term risk/return trade off. They’re willing to take risk with most of their available assets. Mid-high risk investors are typically experienced investors, who have used a range of investment products in the past. Mid-high risk investors will usually be able to make up their minds on financial matters quite quickly. While they can suffer from regret when their decisions turn out badly, they can accept that occasional poor outcomes are a necessary part of long-term investment. Mid-high risk investors with time horizons of ten years or more typically have portfolios with a majority of higher risk investments such as equities, but that also contain bonds and cash. Wealth Multiplier (Aggressive) In general, high risk investors want the highest possible return on their capital and are willing to take considerable amounts of risk to achieve this. They’re usually willing to take risk with all of their available assets. High risk investors typically have substantial amounts of investment experience and will typically have been managing their own investments. High risk investors have firm investment views and will make up their minds on financial matters quickly. They do not suffer from regret to any great extent and can accept occasional poor outcomes without much difficulty. High risk investors with time horizons of ten years or more typically have portfolios made up primarily of higher risk investments such as equities, with little in bonds and cash. 21
  22. 22. CHAPTER 2 22
  23. 23. REVIEW OF LITERARURE Terrence A. Hallahana, Robert W. Faffb, and Michael D. McKenziea analyze a large database of psychometrically derived financial risk tolerance scores (RTS) and associated demographic information. They find that gender, age, number of dependents, marital status, income, and wealth are significantly related to the risk tolerance scores. Robert Faff explores the linkage between financial risk tolerance (FRT) and risk aversion. Michael McCrae examines the potential effects of question framing on risk attitude assessments by financial planners and explores the implications for matching risk attitudes to standardized portfolio categories. Geoff Davey and Paul Resnik casts serious doubt on the common belief that if a client’s risk tolerance is ‘too low’ it can be ‘fixed’ or ‘improved’ by adviser education. In many cases it would seem that clients simply feed back to the adviser what they think the adviser wants to hear. Robert Faff, Daniel Mulino, Daniel Chai of Monash University explores the linkage between two related concepts describing an individual’s attitude towards risk, namely, financial risk tolerance (FRT) and risk aversion. Michael J. Roszkowski, PhD Geoff Davey present data on risk tolerance collected pre- and post crisis inception, showing that the decline in risk tolerance was relatively small. What has changed more dramatically is the public’s perception of the risk inherent in investing. Both risk tolerance and risk perception influence investing behaviour. 23
  24. 24. CHAPTER 3 24
  25. 25. RATIONALE OF THE STUDY The rationale behind the study is: • To make the individuals aware of their risk profile. • To analyze the attitude of investors towards risk taking. • To analyze the risk tolerance power of the individuals. • To assist suitable portfolio to the individuals according to their risk profile. • To examine the knowledge of individuals about various sectors of investment. • To check the psychology of individuals for investment in both private n public sectors. 25
  26. 26. OBJECTIVES OF THE STUDY • The objective of the study is to perform “Risk profiling” of the individuals across various segments of the society so as to check the “Risk Tolerance” of different individuals and to make them aware of their “Risk Profile”. • The objective of identifying risk profile is to arrive at an appropriate investment mix which would align with the objective of an investor. 26
  27. 27. CHAPTER 4 27
  28. 28. RESEARCH METHODOLOGY NATURE OF THE STUDY The study is exploratory in nature. It includes investigation into a problem or situation which provides insights to the researcher. The research is meant to provide details where a small amount of information exists. It may use a variety of methods such as trial studies, interviews, group discussions, experiments, or other tactics for the purpose of gaining information. TYPE OF DATA COLLECTED There are two types of data used. They are primary and secondary data. Primary data is defined as data that is collected from original sources for a specific purpose. Secondary data is data collected from indirect sources. PRIMARY SOURCES These include the survey or questionnaire method, telephonic interview as well as the personal interview methods of data collection. SECONDARY SOURCES These include books, the internet, company brochures, product brochures, the company website, competitor’s websites etc, newspaper articles etc. SAMPLING Sampling refers to the method of selecting a sample from a given universe with a view to draw conclusions about that universe. A sample is a representative of the universe selected for study. SAMPLE SIZE The sample size for the survey conducted will be 50 respondents. SAMPLING TECHNIQUE Random sampling technique was used in the survey conducted. 28
  29. 29. CHAPTER 5 29
  30. 30. DATA ANALYSIS AND INTERPRETATION The kinds of information we collect from 50 clients through questionnaire are as follows: 1) Which of the following best describes your current stage of life? INTERPRETATION From the 50 respondents – • 24 respondents were found to have a mature family. • 14 respondents were found to have a young family. 30
  31. 31. • 10 respondents were found to be single. • 2 respondents were found to be single with dependent parents. • 1 respondent was found to be at the stage of nearly retirement. • 1 respondent was found to be at the stage of retirement. 2) How familiar are you with financial markets? INTERPRETATION From the 50 respondents – • 23 respondents were found to have a fair amount of knowledge and investment experience. • 17 respondents were found to have considerable knowledge and comfortable with most investment avenues. 31
  32. 32. • 8 respondents were found to have basic knowledge and little experience with investment. • 2 respondents were found to have extensive knowledge of and experience in investing in different asset classes. Some financial markets only allow participants that meet certain criteria, which can be based on factors like the amount of money held, the investor's geographical location, knowledge of the markets or the profession of the participant. 3) Which of the following best describes your purpose of investing? INTERRPRETATION From the 50 respondents, the purpose of investing of – • 22 respondents were found to grow capital and generate regular income. • 20 respondents were found to grow capital. 32
  33. 33. • 8 respondents were found to protect capital and earn regular income. Investing means putting your money to work for you. Essentially, it's a different way to think about how to make money. Growing up, most of us were taught that you can earn an income only by getting a job and working Investing can be used as a way to enhance your employment income, helping you to buy the things you want. Because investing changes along with the investor's desired goals, this type of investing is not like retirement investing. Investing to achieve financial goals involves a blend of long-term and short-term investments. 4) Your current investment portfolio comprises of: INTERRPRETATION From the 50 respondents, the portfolio of – • 15 respondents comprises of mainly debt market instruments, gold and some portion in blue chip stocks 33
  34. 34. • 15 respondents mainly aggressive stock, high-yield debt funds, (small and midcap stocks and income funds) private equity and real estate • 12 respondents comprises of a mix of debt instruments, blue-chip/aggressive stock, capital protected and direct equity. • 7 respondents comprises of mostly speculative or high-risk investments (aggressive stocks, high-risk funds, options, real estate, leveraged positions, etc.) • 1 respondent comprises of mainly money market, short-term funds, corporate/bank deposits and bonds. 5) Have you planned for major life stage expenses like your child’s Education, marriage, purchase of house, medical/hospitalization, Retirement etc? INTERPRETATION From the 50 respondents – • 37 respondents have made some provision for such expenses. 34
  35. 35. • 10 respondents have a separate provision for such expenses. • 3 respondents have no separate provision for such expenses. Financial Planning provides direction and meaning to your financial decisions. It allows you to understand how each financial decision you make affects other areas of your finances. For example, buying a particular investment product might help you pay off your mortgage faster or it might delay your retirement significantly. By viewing each financial decision as part of the whole, you can consider its short and long-term effects on your life goals. You can also adapt more easily to life changes and feel more secure that your goals are on track. 6) When do you plan to start withdrawing money from your investment for major needs? (Other than provisions made as mentioned in que 5) INTERPRETATION From the 50 respondents – • 24 respondents were found who plan to start withdrawing money from their investment for major needs between 1 and 3 years. 35
  36. 36. • 21 respondents were found who plan to start withdrawing money from their investment for major needs between 3 and 5 years. • 3 respondents were found who plan to start withdrawing money from their investment for major needs within 1 year. • 2 respondents were were found who plan to start withdrawing money from their investment for major needs between 5 and 10 years. 7) Is your family sufficiently secured to face any unforeseen eventualities? INTERPRETATION From the 50 respondents – • 36 respondents have taken enough life insurance cover for self and my family. • 7 respondents along with life insurance coverage for themselves, have insured all major assets (like house, vehicle etc.) • 6 respondents have not taken enough life insurance coverage. 36
  37. 37. • 1 respondent have not taken any insurance coverage. 8) To meet foreseen and unforeseen circumstances you need to keep…. of your investments in liquid instruments? INTERPRETATION From the 50 respondents, to meet foreseen and unforeseen circumstances – • 22 prospects need to keep 25%-50% of their investments in liquid instruments. • 22 prospects need to keep 10%-25% of their investments in liquid instruments. • 6 prospects need to keep below 10% of their investments in liquid instruments. 37
  38. 38. An instrument that can be converted into cash quickly and with minimal impact to the price received. Liquid instruments are generally regarded in the same light as cash because their prices are relatively stable when they are sold on the open market. 9) If your investment turns bad due to global economic melt-down, for how long would you be prepared to see your investment performing poorly before getting worried and/or liquidating it? INTERPRETATION From the 50 respondents, if their investment turns bad due to global economic melt-down – • 31 prospects are prepared to hold their investment before liquidating it up to 12 months. • 10 prospects are prepared to hold their investment before liquidating it up to 2 years. • 5 prospects are prepared to hold their investment before liquidating it up to 6 months. 38
  39. 39. • 3 prospects are prepared to hold their investment before liquidating it up to 3 years or more. • 1 prospect are prepared to hold their investment before liquidating it less than 3 months. 10) How will you best describe your investment behaviour? INTERPRETATION From the 50 respondents – • 30 respondents seek moderate capital growth over a long-term period with short- term fluctuations, but averse to taking high risks. • 10 respondents seek substantial investments returns, willing to accept occasional short-term declines. 39
  40. 40. • 8 prospects willing to withstand minor fluctuations in my portfolio but prefer to be invested in less risky investments. • 2 prospects seek potentially high investment returns, willing to accept higher risks including loss of capital 11) You will be most comfortable investing in portfolio…. The table shows the worst and the best one year return of five hypothetical investment plans: INTERPRETATION From the 50 respondents – • 30 respondents are most comfortable in investing in portfolio with 10% indicative return and 10% risk volatility. 40
  41. 41. • 10 respondents are most comfortable in investing in portfolio with 7% indicative return and 2.5% risk volatility. • 9 respondents are most comfortable in investing in portfolio with 12% indicative return and 12% risk volatility. • 1 respondent are most comfortable in investing in portfolio with 15% indicative return and 20% risk volatility. 12) Assuming an inflation rate of 5-7% p.a. over a medium to long-term horizon (3 to 5 yr+) what return do you reasonably expect from your Investments? INTERPRETATION From the 50 respondents, assuming an inflation rate of 5-7% p.a. over a medium to long-term horizon (3 to 5 yr+) – • 37 respondents expect Inflation rate plus 8- 10% p.a. return from your Investments. 41
  42. 42. • 9 respondents expect Inflation rate plus 11- 15% p.a. return from your Investments. • 4 respondents expect Inflation rate plus 5- 7% p.a. return from your Investments. The rate at which the general level of prices for goods and services is rising, and, subsequently, purchasing power is falling. Central banks attempt to stop severe inflation, along with severe deflation, in an attempt to keep the excessive growth of prices to a minimum. 13) If your investment in a particular stock falls by 25% and there is no Change in the fundamentals of the company (assuming that your Circumstances and conviction about that stock has not changed), you will: INTERPRETATION From the 50 respondents, if their investment in a particular stock falls by 25% and there is no change in the fundamentals of the company – • 22 respondents were found to sell part of your holdings in that stock. 42
  43. 43. • 18 respondents were found to sell all holdings in that stock. • 7 respondents were found to buy more of the stock. • 3 respondents were found to hold in order to get better returns. 14) Do you leverage your investments? INTERPRETATION From the 50 respondents – 19 respondents were found to be agreeing in leveraging their investments. 31 respondents were found not to be agreeing in leveraging their investments. Leverage helps both the investor and the firm to invest or operate. However, it comes with greater risk. If an investor uses leverage to make an investment and the investment 43
  44. 44. moves against the investor, his or her loss is much greater than it would've been if the investment had not been leveraged - leverage magnifies both gains and losses. In the business world, a company can use leverage to try to generate shareholder wealth, but if it fails to do so, the interest expense and credit risk of default destroys shareholder value. OVERALL INTERPRETATION From the overall data, we get the estimation that out of 50 respondents – • 30 respondents were found to be at balanced state that is 60% of the total respondents are falling is “Wealth Builder” risk profile. 44
  45. 45. • 16 respondents were found to be at growth state that is 32% of the total respondents are falling is “Wealth Enhancer” risk profile. • 4 respondents were found to be at conservative state that is 8% of the total respondents are falling is “Wealth Keeper” risk profile. • None of the respondents fall in “Wealth Guard” and “Wealth Multiplier” risk profile. DISCUSSION This study is about assessing the risk capability of individuals from different segments of the society such as businessmen, doctors, professionals, professors, and it includes all the stages of life. Under this study, most of the respondents belong to mature family class that is they are mature enough to take investment decisions and although they should have sufficient knowledge of financial market so that they must be aware of the investment options which can be suitable for their objectives along with the risk associated with the return. Under this study, I have given strong consideration to their purpose of making of making investment decisions so that I may came to know about their attitudes and perceptions behind taking risk and their objectives. Some of them wants to grow their capital but don’t want to take that much risk associated with it. So their investment decision is not particular because that investor is not aware of the relationship between risk and return that the risk and return are related to one another. Thus, after assessing their risk profile they will be in a better position and will be able to easily determine the risk associated with their expected returns. According to the study, if, in case, investment turns bad due to global economic meltdown, most of the investors can see their investments performing poorly only up to less than 12 months which is very shorter time, rather they should hold their investment for at least 2 to 3 years because economy will take at least some years to turn up and to its previous high position and enjoys positive returns. Overall, behavior of most investors is to seek moderate capital growth over a long time period with minimal fluctuations but averse to take high risks. In the study, I have shown the returns of five hypothetical investment plans which include indicative returns, worst returns along with the risk volatility. 45
  46. 46. Suppose if indicative return is 6%, so in that case, best return will be 6%, worst return will be 6% and here risk volatility is nil. If indicative return is 7%, here best return will be 12% and worst return will be 2% and here risk volatility will be 2.5%. As indicative return will increase, returns and risk volatility will move according to that. Most respondents prefer to have indicative return 10% which will give 30% as bets return, worst return is -10% and risk volatility here is 10%. In this study, I have also taken into consideration the inflation rate of 5% -7% p.a. over a medium to long term horizon (3 to 5 years). Maximum respondents prefer to have return of 8% - 10 % plus inflation rate so that can meet up with their objectives. For understanding the attitudes and perception of investors, I have taken into consideration a situation that if the investment in a particular stock falls by 25% and there is no change in the fundamentals of the company( assuming that your circumstances and conviction about that stock has not changed), then what will they do. So most of the respondents answered that they want to sell part of their holdings in that stock i.e. they will wait for the stock to get back its position for better returns. While most investors don’t want to leverage their investment for future purpose. On the basis of above discussions, I have divided the investors into five categories which are as follows – • Risk averse • Conservative • Balanced • Growth • Aggressive In my study, 8% of the investors are conservative in nature i.e. basically they the wealth keepers, 32% are growth in nature i.e. wealth enhancer and 60% are of balanced category i.e. wealth builder in nature. That’s all about what I have observed in my study – “Categorization of individuals across various segments of the society in different risk profiles according to their financial status. “ 46
  47. 47. CHAPTER 6 47
  48. 48. FINDINGS OF THE SYUDY • A mostly respondent belongs to mature class family. • Mostly respondents have sufficient knowledge of financial market so they come to know about risk associated with the returns. • Mostly respondents have purpose of investment is to grow capital. • Mostly respondents portfolio consists od debt instruments, gold,and blue chip companies stocks. • Mostly respondents have made provisions for future expenses. • Mostly respondents want to withdraw their money for future needs between 1 to 3 years. • Mostly respondents have taken enough life insurance coverage for self and others. • For meeting foreseen and unforeseen circumstances, people used to have 25-50 % of their investments in liquid instruments. • In case of investment turns out bad due to global economic meltdown, so investors can see that investment performing poor up to 12 months. 48
  49. 49. • Mostly risk volatility faced by respondent is 10% and in that case, worst return will be -10%, indicative return is 10% and best return will be 30%. • Mostly respondents expect returns of 8-10% plus inflation rate of 5-7% over 3 to 5 years+. • 8 % respondents are wealth keeper (conservative). • 32% respondents are wealth enhancer ( growth) • 60% respondents are wealth builder (balanced growth). LIMITATIONS OF THE STUDY • Geographical – The geographical limitation of the study is that it is not possible to perform the survey among those investors who are situated at large distances geographically. So it limits the sample size. • Psychological – The psychology of the investors also play a key role in deciding their risk profiles because investors will invest as per their psychology also. 49
  50. 50. RECOMMENDATIONS • Investor should have sufficient knowledge about financial market before taking investment decisions so that they should know the risk associated with the returns. • The purpose of investment should be clear in the minds of investor before taking investment decisions so that they can choose their portfolio according to that. • The purpose may be short or long term investment. 50
  51. 51. • Investor should have sufficient provisions before investment so that they can cope up with the losses, if any, arises due to investment. • Investor should be sufficiently secured before coming into investment decisions. • Investor should consider the inflation rate before taking investment decisions. 51
  52. 52. CHAPTER 7 FUTURE SCOPE OF THE STUDY • This research has importance to financial advisors. Advisors should understand that some clients are better able to forecast their risk tolerance than others. Forecast accuracy, since it appears to be influenced by education (knowledge), may be a proxy for risk tolerance understanding. As an advisor attempts to enlighten a client about risk and risk tolerance, it is quite possible that certain 52
  53. 53. clients will grasp the concept more readily than others. Obviously, the ability of the client to grasp the concept of risk tolerance is an important factor in how the advisor approaches and manages the client relationship. • Deeply study about the factors of the study can be done. • This study will contribute great financial help to the upcoming generation. • To researcher - The study is expected to help the researcher in assessing the risk profiles of the individuals. • To Investors – The study will help investors to invest according to their different risk profiles. • To Financial Institution- The study will help financial institutions to introduce various investment schemes according to the different risk profiles of the investors. 53
  54. 54. CONCLUSION Know-the-client has always been a cornerstone of financial Planning and knowing the client’s risk tolerance is an essential component of that obligation, even more so in a fiduciary environment. Following questionnaire ensures that a valid, reliable and accurate assessment is made, allowing the planner to provide a more informed service in the proper discharge of his or her obligations while providing clients with a pleasurable experience in an early demonstration of planning expertise. The degree to which an investor is willing and able to accept the possibility of an uncertain outcome to an economic decision. A measure of risk tolerance is useful in summarizing an investor's perception about the tradeoff between risk and the compensation required for bearing risk. It is useful to review what we already know about risk tolerance as well as a few of the specific risk-assessment techniques employed by money managers. Our survey of existing risk-tolerance assessment techniques showed that a great deal of effort has gone into characterizing the physiological and psychological makeup of investors. However, for all the sophistication and creativity that have been brought to bear on this problem, the critical issue of why individuals have different preferences has not been adequately addressed. In particular, very little is known about a specific, but extremely important, judgment all financial advisors need to make in the early stages of their work with clients, namely, estimating a client’s level of financial risk tolerance. Accurately assessing a client’s level of financial risk tolerance is an important task within the financial planning process because a person’s level of risk tolerance impacts on a diverse number of financial decisions, such as portfolio management, type of mortgage, insurance deductibles, emergency fund savings, estate planning, and even divorce mediation. Advisors and clients with the same exact risk-tolerance levels may view themselves as being different on that characteristic simply because their reference groups differ. For instance, an advisor with a moderate level of risk tolerance may see himself or herself as low risk tolerant because the group being used as the benchmark. i.e., other advisors, will be greater in risk tolerance than the general public. Someone who is low risk tolerant when benchmarked against advisors could be average or even high risk tolerant when the norm group is the general public. Financial planning advice should emphasize client education, particularly on the pitfalls of herding behavior resulting from overweighting recent events, where the investor might end up buying securities when prices are high and selling when prices are low. It is important to emphasize the long-term characteristics of the asset classes in an investor’s portfolio constructed based on his/her risk tolerance, rather than just recent performance. The adage, past performance is not indicative of future performance, still applies. 54
  55. 55. CHAPTER 8 55
  56. 56. ANNEXURE 1 BIBLIOGRAPHY / REFERENCES • www.adityabirlamoney.com • www.moneycontrol.com • www.authorstream.com • www.managementparadise.com • www.scribd.com • www.wikipedia.org • www.investopedia.com 56
  57. 57. • International Journal of Risk Management, Volume 1 Number 1(Jan-Jun 2011) • Financial Planning Journal (Jul–Sep 2009) • Financial Risk Management, Asthana, 2010. • Financial Engineering, Marshal & Bansal, 2010. • Introduction to Risk Management, Dorfman ANNEXURE 2 QUESTIONNAIRE The kinds of information we collect from them through questionnaire are as follows: 1) Which of the following best describes your current stage of life? a) Single (10 marks) b) Single with dependent parents (6 marks) 57
  58. 58. c) Young family (6 marks) d) Mature Family (8 marks) e) Nearing retirement (4 marks) f) Retired (2 marks) 2) How familiar are you with financial markets? a) I have no knowledge (2 marks) b) I have basic knowledge and little experience with investment (4 marks) c) I have a fair amount of knowledge and investment experience (6 marks) d) I have considerable knowledge and am comfortable with most (8 marks) investment avenues e) I have extensive knowledge of and experience in investing in (10 marks) different asset classes 3) Which of the following best describes your purpose of investing? a) To protect capital (2 marks) b) To protect capital and earn regular income (4 marks) c) To grow capital (6 marks) d) To grow capital and generate regular income (8 marks) e) To build long-term wealth (10 marks) 4) Your current investment portfolio comprises of: a) Mainly money market, short-term funds, corporate/bank (2 marks) deposits and bonds b) Mainly debt market instruments, gold and some portion in (4 marks) blue chip stocks c) A mix of debt instruments, blue-chip/aggressive stock, capital (6 marks) protected and direct equity d) Mainly aggressive stock, high-yield debt funds, (small and (8 marks) midcap stocks and income funds) private equity and real estate. e) Mostly speculative or high-risk investments (aggressive stocks, (10 marks) high-risk funds, options, real estate, leveraged positions, etc.) 58
  59. 59. 5) Have you planned for major life stage expenses like your child’s Education, marriage, purchase of house, medical/hospitalization, Retirement etc? a) I have no separate provision for such expenses (2 marks) b) I have made some provision for such expenses (4 marks) c) Yes, I have a separate provision for such expenses (6 marks) 6) When do you plan to start withdrawing money from your investment for major needs? (Other than provisions made as mentioned in que 5) a) Within 1 year (2 marks) b) Between 1 and 3 years (4 marks) c) Between 3 and 5 years (6 marks) d) Between 5 and 10 years (8 marks) 7) Is your family sufficiently secured to face any unforeseen eventualities? a) Along with life insurance coverage for self, I have insured all my major (8 marks) assets (like house, vehicle etc.) b) I have taken enough life insurance cover for self and my family (6 marks) c) I have not taken enough life insurance coverage (4 marks) d) I have not taken any insurance coverage (2 marks) 8) To meet foreseen and unforeseen circumstances you need to keep…. of your investments in liquid instruments? a) More than 50% (2 marks) b) 25%-50% (4 marks) c) 10%-25% (6 marks) d) Below 10% (8 marks) 59
  60. 60. e) None of my investments (10 marks) 9) If your investment turns bad due to global economic melt-down, for how long would you be prepared to see your investment performing poorly before getting worried and/or liquidating it? a) Less than 3 months (2 marks) b) Up to 6 months (4 marks) c) Up to 12 months (6 marks) d) Up to 2 years (8 marks) e) Up to 3 years or more (10 marks) 10) How will you best describe your investment behavior : a) I feel comfortable with investments that involve lower risk and (2 marks) generate lower but consistent returns year-to-year b) I am willing to withstand minor fluctuations in my portfolio but (4 marks) prefer to be invested in less risky investments c) I seek moderate capital growth over a long-term period with short- (6 marks) term fluctuations, but averse to taking high risks d) I seek substantial investments returns, willing to accept occasional (8 marks) short-term declines e) I seek potentially high investment returns, willing to accept higher (10 marks) risks including loss of capital 11) You will be most comfortable investing in portfolio…. The table shows the worst and the best one year return of five hypothetical investment plans: 60
  61. 61. Indicative Return Best Return Worst Return Risk Volatilit y a) 6% 6% 6% Nil (2 marks) b) 7% 12% 2% 2.50% (4 marks) c) 10% 30% -10% 10% (6 marks) d) 12% 45% -25% 12% (8 marks) e) 15% 60% -30% 20% (10 marks) 12) Assuming an inflation rate of 5-7% p.a. over a medium to long-term Horizon (3 to 5 yr+) what return do you reasonably expect from your Investments? a) Inflation rate plus 2- 4% p.a. (2 marks) b) Inflation rate plus 5- 7% p.a. (4 marks) c) Inflation rate plus 8- 10% p.a. (6 marks) d) Inflation rate plus 11- 15% p.a. (8 marks) e) More than 15% p.a. over inflation rate (10 marks) 13) If your investment in a particular stock falls by 25% and there is no Change in the fundamentals of the company (assuming that your Circumstances and conviction about that stock has not changed), you will: a) Not trade in stocks (2 marks) b) Sell all holdings in that stock (4 marks) c) Sell part of your holdings in that stock (6 marks) d) Hold in order to get better returns (8 marks) e) Buy more of the stock (10 marks) 14) Do you leverage your investments? a) Yes (8 marks) b) No (2 marks) 61
  62. 62. On the basis of above information collected, we gave them certain marks and calculate total score of it and finally we categorize them into different categories as follows – • Wealth Guard (Risk Averse) 28 - 43 • Wealth Keeper (Conservative) 44 – 67 • Wealth Builder (Balanced) 68 – 91 • Wealth Enhancer (Growth) 92 – 115 • Wealth Multiplier (Aggressive) 116 – 130 According to the risk profile of the individuals, we suggest them optimum portfolio model i.e. what proportion of their investment they should invest in low risk debt, long/short term debt, equity and alternatives etc. MODEL PORTFOLIO 62
  63. 63. The model portfolio is a bird’s eye view of risk-return profiles of different individual investors who belong to different categories. The model portfolio starts from a point of conservative approach to investments with moderate risk and returns, and moves up in scale to investments which carry higher risks, and therefore, higher returns. Each investor can identify himself with one of the model portfolio as his ideal allocation. Once the model portfolio is fixed, the asset allocation ideally follows. The format of a Model Portfolio is shown below - Wealth Guard (%) Wealth Keeper (%) Wealth Builder (%) Wealth Enhancer (%) Wealth Multiplier (%) Low Risk Debt 70 50 30 20 15 Corporate/Bank Deposits Post Office & RBI/PSU Bonds (FMPs) Liquid/Ultra short Term Funds Long/Short Term Debt 30 35 30 20 15 Short Term Funds Income Funds Gilt Funds - Medium to Long Term Equity 0 15 30 40 50 Diversified Equity Funds Direct Equity/Derivatives Private Equity Alternate 0 0 10 20 20 Other asset Class (Gold, etc.) Structured Products(Capital protected Structured Products(Non-capital protected) Total 100 100 100 100 100 63

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