How to set the right Risk Appetite in Smallcase
Risk appetite and risk tolerance are one of the most important criteria in selecting investments. Let’s look at how to match them in Smallcases. One thing has become certain in the market situations over time- there is no such thing as a “free lunch.” Returns on your investments, like anything else, have a cost. To achieve large gains, you must be able to tolerate severe volatility. In other words, a high rate of return on your investment is a reward for taking on a high level of risk. This is referred to as the risk-reward trade-off. What is Risk Appetite? People frequently invest in products offered by relationship managers and investment agents strictly on the grounds of the rate of return. However, there are other important indicators that investors tend to overlook at this stage. Risk is one of the essential considerations of all. Before purchasing a smartphone, we give it a lot of thought. We look at the features, performance, and, of course, the pricing. We would never buy phones costing Rs 50,000 even if we were merely price sensitive. We want to create a balance between the utility they (smartphones) provide and their cost. Similarly, the risk is a significant consideration in investments, along with return potential. Almost all investment products are subject to some level of risk; only the degree of
exposure varies. As a result, before you naively buy financial items, it’s critical to grasp your risk tolerance levels. The next thing that comes to our mind is: how can we assess our risk appetite and risk tolerance? The majority of investors make the error of conflating these two categories (risk appetite and risk tolerance). These are two distinct concepts that must be examined separately before making investing decisions. Risk appetite refers to your willingness to take risks, whereas risk tolerance refers to your ability to do so. You may enjoy sky diving, bungee jumping, and other extreme sports, but you must be physically fit to participate in them. Similarly, as an investor, you may be a risk-taker who would not hesitate to invest in high-risk ventures. However, before making investing selections, it is critical to analyze your current condition and commitments well into the future. What actually is Smallcase? Should you use these to invest in stocks? Individual stocks can be bought through a broker. But the onus to make the stock picks for the portfolio lies with the investor. ETFs are funds that ape an index, but the composition of the fund is restricted to the chosen index components. Here is where Smallcases find their footing. A new-age investment avenue, Smallcases are bucket investments consisting of carefully chosen stocks and ETFs, handpicked and managed by professional fund managers, and made available to you as theme-based investments. Sebiregistered investment advisors such as TejiMandi and brokerages are now allowing investors to purchase the entire ready-made portfolio of securities based on specific themes or ideas in one transaction.