Just the way we have different categories of mutual fund schemes depending on their riskiness, we also group investors into similar categories based on their risk profile. Investors can be classified into aggressive, moderate and conservative risk profiles based on two factors. The risk profile of an investor is dependent on his/her ability to take risk (risk capacity) and willingness to assume risk (risk aversion). If an investor has both low willingness and ability to take risk, we call him/her conservative investor who should invest in low risk investment products like debt funds, bank FDs.
If an investor has high ability and willingness to take risk, such investor is best advised to invest in aggressive risk category products like equity mutual funds, direct equity. However, if an investor has high willingness to take risk but low ability to assume risk or vice-versa, such investor is best advised to invest in moderate risk investment products. These investors are referred to as moderate investors who would like to take moderate risk that doesn’t jeopardize their life. They prefer to invest in balanced mutual funds.
Investments are considered suitable for an investor if the investments’ risk fall within the limit of the investor’s risk capacity and risk aversion.