Changing Risk Appetite in Post COVID Scenario
Investment is an inextricable part of achieving financial life goals or wealth creation which is not luck by chance. It is possible only if the rate of return on investment is able to fetch the post-tax returns which must otherwise produce returns i.e. higher than rate of inflation. The pandemic due to corona virus has impacted globally and all investments have come to a new level of risk. This COVID-19 scenario has made it very much imperative to analyze risk appetite before investing particularly, in case, if decision is to take on selection of a fresh investment product or avenue.
A new trending investor’s behaviour is being seen in the market is that the risk taking capacity of high risk takers has slightly shifted towards moderate risk takers and moderate risk takers are shifting towards conservative ones. This shows that the capacity of conservative risk takers who already invest in safer avenues and prefer liquidity would furthermore prefer to hold their surpluses to provide for their liquid needs. This is expected to hit retail investment scenario in the economy and also a delay in achieving investors’ life goals would occur.
It is generalized that opting for higher risky investments (not always but most of the times) reward for higher returns. But in the current scenario when uncertainty is glooming, investment risk is higher than normal across economies and if the proponent of “higher the risk- higher the return” are still stick to it then situation is alarming. This calls upon investors particularly who fall in the between moderate and high risk taking capacities.
An effort has been made in this article to help investors and reminded of the degree of risk which depends on various variables as micro level factors of an individual self within family. Some of these factors are- Financial stability, number of dependents, age of investor, loss tolerance capacity, work space, which are elaborated as follows-
- A stable financial system is helpful in efficiently allocating resources, calculating and managing risk. The perceived steady returns might not be able to take you to places you wish to be at and risk might be combined. Henceforth, one may be far away from life goals. However, when you want to easily access your liquid funds the last thing you want to worry about financial market position and hence Risk Evaluation become the must in this regard.
- Life seems to be extremely difficult when you find yourself to depend on others. Being in a young age, financial scenario has a different perspective. When it comes to the number of dependents on your income who are indeed a kind of fixed monthly obligation to you then your financial responsibilities towards your family may affect your risk appetite up to an extent which you need to assess. There are few basic needs which you need to fulfil monthly from your designed income source. Additional responsibilities like your child education, marriage, loans or premiums cumulatively demands major part of your income.
The risk appetite reduces with the increase of age. Risk tolerance is usually estimated with the financial situation and the person’s age. As a person who nears to retirement, would like to secure his retirement on basis of his volatility portfolio. On the other hand a younger person are more defined and initiate investment in equities with higher risk investment as he has sufficient time to recover the losses. In the near future, it’s not the past performance of portfolios but the investor should look in to his or her age and accordingly give the ranking to investment options.
- You need to question yourself – Are you able to bear the chunk of loss of your investment? Do you have sufficient funds to carry on, if your principal investment is not rewarding you but rather getting it downgraded? All these can easily help you to analyze how much you are ready for risk appetite.
- Attitude towards risk need to be taken in to consideration. Investors need to analyze the nature of investment decisions and the influence of risk. The behavioral and the thinking pattern of a person to assume risk plays a vital role during investing. Positive approach helps to earning more and plays a significant role to determine risk attitude but the impact of COVID crisis on investment should be given weightage to other factors associated with attitude towards risk while investing.
Ways of measuring risk appetite may be applied as per- Psychological tests that consider behavioral characteristics of individuals which varies from person to person in the hypothetical situations. There are Risk assessment tests which help in knowing psychological trends of an investor who reacts to various risks situations at different times differently. Supplementing internal view with external perception involves assessment about a company’s stock price which might differ to stakeholders.
Instances- where an investor fails to assess the risk himself or herself while investing, it may be reaching benefit to the agent or broker of investing company. Here- what is required is a diligent call of investors by themselves. The foremost action requires at investors level is to evaluate the risk, return and liquidity alongside the costs to life goals beforehand or in other words handing over the cheque to investible avenue.
This article has been contributed by CA Ridhima Shukla, Ms. Priyanka Parashar and Ms. Neha Malkan for TDP Global Consulting.
Comments (if any) to contributors may please be sent at [email protected].
By CA Ridhima Shukla, Ms. Priyanka Parashar and Ms. Neha Malkan