Thinking of buying a smartphone? How would you decide upon the right one? Different people want different features in their phones. For instance, you may first consider the features of the phone, whereas I may consider the phone's performance and price. So, we all think from different perspectives, not just about phones but about almost everything, including investing. Every investor is unique and has different risk appetite and risk-tolerance levels. The following factors will help you decide your risk appetite and risk-tolerance level.
How crucial is your money?
A sum of Rs 5 lakh may hold little importance for someone having an investable surplus of Rs 1 crore. An erosion of Rs 5 lakh following a fall in the market may not affect him much. But for someone who has a Rs 10 lakh corpus, a fall of Rs 2 lakh would unnerve him.
It is this aspect of money that actually drives your thinking process in the market. The lower the criticality, the more aggressive you can be with your investment!
How negotiable is your goal?
While some goals can be delayed, some come with a pre-decided period and can't be postponed, such as investing for your kid's education. On the other hand, some goals can be negotiable and postponed, such as buying a car, going on a vacation or buying your own house. Normally, you wouldn't like to take unwarranted risk with your non-negotiable goals. Your negotiable goals can entail some risk depending on the specifics of your case.
What is your experience in the market?
Many of you may have started investing after weighing its pros and cons. On the other hand, some may have started randomly and developed an understanding later. This experience in the market is unique to each of us. Your risk profile hinges much on your comfort level with market volatility. With more experience, one can consider more dynamic options.