While returning from office there was a great relief on Sanchit’s face on a Monday morning because of an unexpected drizzle. On the other hand as the rain increased, Sanchit’s friend Saurabh spotted all the parents opening their umbrella to protect their children from rain, some of them are in search of shelters to avoid getting wet and one fast-food vendor took a large plastic sheet to protect his food stuffs even before himself. On seeing this Saurabh said, “So everyone has their own way of risk tolerance and survival, right Sanchit?”
Sanchit answered, “In day to day work; we are taking risk and simultaneously try to survive from it. Risk and survival go hand-in-hand in every field of life. But there is a significant difference when it comes to taking financial risk.”
“Can you please elaborate?”, Saurabh asked.
“Yes. Why not? We all know that investing is a powerful tool to increase one’s wealth. But at the time of investing we do not ask ourselves why investment in life insurance is being done? What are the products to consider? Getting into investing without knowing the reason and clear understanding is like setting off on a treasure hunt without map and clues. It is not difficult to understand why and what investing is because once you understand these two aspects it is very easier for you to choose the right product which will meet your needs.
The first step to investing is to understand the purpose of investment which will determine the level of risk tolerance and the kind of product to suits your risk profile. For instance at the age of 30 if you want to invest for an early retirement and for your child’s education who is one-year old, you have a long time horizon and here you will prefer to invest in new age ULIPs with a child plan. But when you are looking for a short-term goal or for some contingency then you have to take low risk and the risk tolerance is very low for this investment. So in both the cases the types of products will be different to meet the different needs.
Your family environment also plays a big role while taking risk. For instance, if you are the sole bread-earner and have family responsibility of sick parents and children then you may be a risk averse and a conservative investor. On the other hand if you are well-settled in your career with limited responsibility you may be comfortable with a higher level of risk. Guide to Financial Planning also plays a vital role in the field of risk tolerance. If you are financially secure or have inherited wealth, you can have more risk tolerance power.
The decision of how much risk to take and what type of product to invest in is very critical in the field of investment. You can have a professional view for taking risk. Life Insurance also plays a vital role in the field of investment while taking risk. If you are insured up to your liabilities then your mind set will allow you to take slightly higher level of risk. Therefore life insurance forms the bedrock of financial planning and best way to begin one’s financial journey. Needs and goals in a person’s life are changing from time to time; the periodic revaluation is needed in your mixed asset allocation, time horizon, liquidity etc. Whether the risk taken is awarded with the desired returns should also be checked from time to time.
You should take risk to the extent where you feel comfortable by keeping in mind and have understanding for the long term goal and have funds for rainy days then he will have a sound sleep.
Keeping this mantra in mind, make the right financial choice of products that will give optimum returns on your money. Wrong choice can make you lose money.”