Risk is a term we keep hearing and seeing during an advertising campaign about a financial investment vehicle or while putting our money as an investment in the financial market. So, what exactly does risk mean in this context? Simply put risk is the degree to which an investor is willing to withstand volatility in his/ her investment returns.

In other words, when an investor can manage to bear the amount of loss during an investment decision, it is termed Risk Tolerance. Risk Tolerance differs from person to person wherein a person having a high source of income can afford to take more risk as compared to a person who has less income source.

Certain factors influencing Risk Tolerance are:

Time Horizon - Each individual opts for different time spam to their investment plans depending on their goals. An investor having ample time can afford to invest for a longer duration.

Goal-Oriented - Financial needs, as well as goals, differ from person to person The main purpose of investors is to receive maximum returns on their investments. However to achieve certain goals definite investment strategy is pursued. Therefore different individuals adopt different risk tolerance levels based on their goals.

Age- The age factor continues to remain as a major factor to comprehend the risk tolerance i.e. it can be calculated by understanding the time frame you hope to achieve your investment goals by. Generally, new investors, particularly young people tend to take more risks than older people who get restricted by their limited time horizon.

Portfolio size - Portfolio size has an important role to play in investments. A huge portfolio means the more tolerant an investor will be towards risk.

Comfort level - Risk Tolerance is directly connected to the comfort zone of an investor. Every investor manages risk differently. Some investors can expose themselves more to the risk depending on their comfort zone.

Levels of Risk Tolerance:

Risk tolerance can be divided into three levels- Aggressive, Moderate, and conservative. Aggressive Risk Tolerance: Portfolios of market pundits with a deep understanding of the know-how of the securities usually come under this group. The goal of these investors is to attain maximum returns through maximum risk and therefore go for high volatile securities like investing in the futures market, options contracts, and small-cap stocks. Moderate Risk Tolerance: Usually the risk taken is balanced. Investors in this group would invest in a combination of bonds and stocks (debt and equity) to cushion any sharp volatility in the market. The horizon for these investors is usually 5-10 years.

Conservative Risk Tolerance: Investors not willing to accept any volatility in their investment portfolios come under this group. They invest in safe instruments such as secured bonds, bank deposits, treasury investments, and more such savings-oriented investments that will help in preserving capital without any risk taken.

Risk tolerance in bond investments:

Predominantly there are two types of bond instruments: secured bonds and unsecured bonds and the fundamental difference between these two types of bonds is the risk of repayment. Secured bonds are a safer option for investors looking to park their funds in comparison to unsecured bonds. Investors with a low to moderate risk tolerance will find secured bonds more comfortable than unsecured bonds. In the event of default on the payment by an issuer of a secured bond, the bond allows the investor to recover dues by liquidating the asset that backs the bonds. Due to this security, investors consider secured bonds good investments even in a low-interest-rate environment. With unsecured bonds, investors don‘t have that security blanket in case of a default by the issuer. Investors can only choose unsecured bonds by their creditworthiness. However, as the high risk means a high interest rate, these kinds of bonds are suitable for investors with high disposable income.

It is prudent for investors to assess their risk tolerance before financial planning as this will give investors a better idea to diversify their investment portfolio. Bondskart has a team of experts who can help and guide you in planning your investment.