Is Your Mutual Fund Portfolio Based On Your Risk Profile?   Jul 19, 2018


Portfolio Based On Risk Profile

Barry Ritholtz, an American author, newspaper columnist, and equity analyst, has aptly said, “When it comes to investing, there is no such thing as a one-size-fits-all portfolio.”

Unfortunately, not many Indian investors understand the importance of customization of financial advice.

Take the example of Shashank and Shekhar.  Both of them are old friends.

Shashank is a 41-year-old techie and has an 8-year-old son and a 5-year-old daughter. He earns about Rs 1.5 lakh a month. His wife, Sushma is a housewife.

Shekhar, 43, is a banker and works as an AVP - Retail Liabilities with a private sector bank. His wife, Sumitra, works with a Public Sector Bank (PSB) as a business development manager. Together, they earn a little over Rs 2 lakh a month. Shekhar has a 10-year-old daughter.

Shekhar, being a banker, takes a keen interest in investing. He has earned a good deal of money by making smart investment moves.

Shashank mimics his friend Shekhar in investments. But he ends up selling his equity shares and mutual funds soon after these investments deliver negative returns in a volatile patch. This has been quite frustrating for him, as eventually the similar portfolio held by Shekhar recovers and makes profits.

Over the last 15 years, Shekhar and Sumitra have managed to create a portfolio of Rs 25 lakh and in next four years, they intend to pay off their housing loan completely.

Shashank and Sushma have managed to grow their investment portfolio only upto Rs 15 lakh and will require 10 more years to repay their home loan.

What’s creating such a difference?

Both the couples have some similar financial goals such as children education and retirement, but there’s a lot of difference in their existing circumstances and that’s making a lot of difference. Shekhar and Sumitra understood this; but unfortunately, Shashank and Sushma didn’t.

Comparative analysis…

Income level:

Shashank is the sole earner in his family of four.

Shekhar and his wife is a couple with double-income.

Dependency: Shashank and Sushma have two children, while Shekhar and Sumitra have just a daughter. This makes the former investor more risk-averse.

Awareness: Shekhar and Sumitra work in the banking and financial sector. They are more informed about the investment scenarios and macroeconomic trends. On the other hand, Shashank and Sushma aren’t abreast with macroeconomic developments and the factors affecting the performance of their investments.

Risk appetite: Shekhar and Sumitra have a higher risk appetite and their investments are in line with their risk appetite. On the contrary, Shashank and Sushma have lower risk appetite, but they often end up investing like aggressive investors. And when met with losses, they can’t sustain it and exit.

Moreover, Shashank doesn’t get much time to look after his investments nor does he take any professional advice.  This is why he, most of the times, relies on Shekhar to make investments.  Shekhar has recommended taking the help of a professional, but, Shashank ignored it. This has cost him a pretty penny.

[Read: Is Mutual Fund Categorization Affecting Your Portfolio? Review It Now!]

After making some big losses recently, he realized he needs professional guidance.

Do you mimic your friends too and wonder why something works for him/her and not for you?

[Read: Why Mimicking Your Friend’s Investments Can Be Risky]

It’s perhaps because he/she has customized the portfolio suited to his/her financial goals, current financial conditions, and the risk appetite.

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Had Shashank and Sushma subscribed to FundSelect Plus, they wouldn’t have made bad investment decisions.

Happy Investing!

Author: PersonalFN Content & Research Team



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