How to know your risk appetite before investing in the stock market—Experts explain

A successful investor is not the one who gains the most, but the one who curbs the losses. Stock markets are volatile, and every investor should consider the risk of losing money before thinking about the returns. Thus, before investing in stocks, one must know how much they want to invest and how much risk they can take. 

How to know your risk appetite?

According to CA Manish Mishra, a fractional CFO and growth advisor, to comprehend one's risk appetite, investors must:

-Assess their financial situation

-Know how long they want to stay invested 

-Diversify their portfolio and choose a combination of properties that fits their risk tolerance. 

Echoing a similar view, Sooraj Singh Gurjar, Founder and MD, Get Together Finance (GTF), advised investors to limit their risk in the initial stage and step up as and when they feel confident.

"In the initial days of your trading journey, do not risk more than 1 per cent of your total capital. As you gain confidence in your study and start analysing minute details of the charts, you can gradually increase your risk appetite. An experienced trader with an accuracy rate of 80-90 per cent, can risk up to 2-3 per cent of their capital," said Gurjar.

Meanwhile, Ravi Singhal, CEO, GCL Broking, believes that psychology and time play important roles in investment. Thus, one should invest in funds that are available for the long term and avoid investing in leveraged products or investing after wise calculations.

He added that while choosing any investment product, one should look into the maximum drawdown possible in any investment product and try to understand if one can control their emotions to that extent. 

Simply put, if an investment advisor suggests that the product can have a 30 per cent drawdown, one must make sure they can control their psychology and will not exit at 20 per cent.

According to Tanvi Kanchan, Head - Corporate Strategy, Anand Rathi Shares and Stock Brokers, overall, the risk-tolerance level does not depend solely on behavioural factors but also on quantitative factors like the objective behind investing. The objective should be further bucketed into the tenor of the goal/ portfolio and also should be accurately benchmarked.

She added once investors get a broad sense of their risk appetite then they need to assess the portfolio with both the factors – risk and return. Investments offering higher return usually has a higher degree of risk attached to it. Thus, the assessment of risk-taking capabilities is one of the critical parts of forming a good long-term portfolio strategy.

Likewise, Abhishek Banerjee, Founder & CEO Lotusdew Wealth & Investment Advisors Pvt Ltd. divided the risk profiling into three parts and explained the whole process.

"Firstly it's behaviour in a hypothetical situation, like how would you react to a 20 per cent loss in your portfolio. Secondly, it's about inferred behaviour from pre-existing conditions like how did you react when the Russia-Ukraine war broke out. Did you add money or remove money? And lastly, it's about self-reported risk attributes like if the person considers herself to be a risk verse person or a risky investor," said Banerjee.

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