Risk Appetite
InvestmentsRisk appetite (or risk tolerance) is the degree of uncertainty in investment returns that an investor is willing and able to accept. It is the foundation of asset allocation decisions. Overstating risk appetite leads to panic selling in downturns; understating it leads to under-investing in equity.
In detail
Two components:n1. Ability to take risk: income stability, time horizon, financial cushion, dependentsn2. Willingness to take risk: psychology, comfort with volatility, past experience with lossesnnSelf-assessment: "If my Rs 10L portfolio dropped to Rs 6L in 3 months, what would I do?"nSell immediately = Low risk appetite (conservative)nReview and hold = Moderate risk appetite (balanced)nInvest more = High risk appetite (aggressive)nnRisk appetite changes: higher when young and earning, lower when near retirement or with dependents.
Real-life example
Meena (28, IT employee, dual income household, no dependents): High ability + High willingness = Aggressive. 80% equity, 15% debt, 5% gold. Rakesh (55, single income, daughter's marriage in 3 years): Low ability + Low willingness = Conservative. 30% equity, 50% debt, 20% gold.