Risk profiling | A key part of personal finance that few understand
Hansi Mehrotra
Asking questions on financial education , investing in India and climate/fintech
Personal finance content tends to focus on ‘investment risks’. Inflation risk: that your money will not keep its purchasing power. Interest rate risk: that your loan repayments can increase while the value of your portfolio decreases at the same time. Market risk: that your portfolio’s current valuation can free-fall because some random oil squabble affects the market mood.
These are all external factors that you need to know, analyse and work around. Inflation, interest rates and markets will always fluctuate; a good financial plan takes these into account. But once market risks are handled, it’s how you react to them that matters.
The biggest risk to a good financial plan is you.
Kind of like life. Even if you’re talented and hard-working, things will suck more than once in your lifetime. It’s how you react to these times that matters.
Obviously, the financial services industry knows this. So it tries to make a ‘risk profile’ on you. This is important enough that regulators mandate it for pretty much every investment transaction — whether you go to a full-fledged professional investment adviser, a limited-scope mutual fund distributor, a fintech platform or even directly approach a financial product provider.
The problem, however, is that different organisations might measure slightly different things, or just measure the same thing badly. Your experience could be very different from place-to-place, and from time-to-time. More importantly, your risk profile may not do what it’s supposed to.
So, what is risk profiling supposed to do?