Evaluate Your Risk Appetite
21st Dec, 2013
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One of the choices you need to make while buying an insurance plan is whether to go for a unit-linked policy (ULIP) or a plan on the traditional platform. In order to be able to decide correctly, you should know your risk appetite, or your tolerance to financial risk.There are four aspects that can help evaluate your risk appetite. They are:
1) Age/stage of life: Your age is an important factor that helps while deciding your risk appetite. It is evident that the younger you are, the more risk you can take. Besides that, at a younger age, the likelihood of a steady income is higher, which means that you are in a safer position to overcome any financial setback. Apart from that, you will also have fewer dependents to take care of.
2) Asset ownership: If you already own assets such as real estate, gold and fixed deposits, they will serve as a ready cushion for you, in terms of financial stability. Therefore, strong asset ownership or high net worth means that you can afford to take a higher financial risk and secure you against fluctuations in the market.
3) Investment experience: Your knowledge about investments and understanding about the market are crucial to identify your risk appetite. People with prior experience in investing in financial markets understand the long-term impact of short-term fluctuations in the market, hence, can take more risk.
4) Investment horizon: Your investment horizon is linked to your financial goal. It normally implies how long you would like to stay invested with a certain plan. If what you have in mind is a long-term goal, you can opt for a risky portfolio with high returns, as the risk would reduce over time. However, if your goal is a short-term goal, opting for a safer investment tool is advisable. Your decision for choosing the right insurance product should be based on your tolerance of financial risk. Opting for an insurance product in line with your risk appetite ensures proper asset allocation and maximises your returns from the product.
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