How many times have you described yourself as a 'moderate-risk' investor? If financial advisor Dhirendra Kumar had a rupee for each time he's heard that phrase, he jokes he could start his own small-cap fund. In a candid piece, the founder and CEO of Value Research argues that 'moderate risk' is the most used yet least understood term in personal finance. It's frequently mentioned, rarely defined, and almost never followed consistently by investors.
The Three Faces of Risk You Must Understand
Kumar points out a fundamental truth: your risk profile is not a permanent tattoo. It shifts with market cycles, your age, job security, life experiences, and crucially, your current mood. On bullish days when markets surge, the average investor's appetite resembles a Bollywood star on a motorbike—fearless and ready for anything from small-caps to crypto. Conversely, during corrections, the same individual retreats to the safety of fixed deposits and gold, seeking written guarantees.
The core of the issue, according to Kumar, is that people conflate three distinct aspects of risk. At Value Research, they strive to separate them:
- Risk Capacity: This is what your financial situation can objectively handle. It's determined by factors like time horizon, income stability, and existing obligations.
- Risk Need: This is the level of risk you must take to achieve your specific financial goals, like retirement or a child's education.
- Risk Tolerance: This is the psychological component—how much volatility your mind and emotions can endure without making impulsive, costly decisions.
The appropriate level of risk for you lies at the intersection of these three, not in the euphoria of a market rally. Kumar illustrates this with an example: a 30-year-old with a stable job and no dependents has a high risk capacity. But if they panic and sell after a 10% drop, their risk tolerance is low. If their goal is to retire early with a large corpus, their risk need is high, making low-return FDs insufficient. This is the real puzzle investors face.
Why Your Risk Appetive is a Moving Target
The constant change in risk appetite is a human trait, driven by market sentiment. In bull markets, high recent returns and social bragging fuel a sense of fearlessness and FOMO (Fear Of Missing Out). In bear markets, the identical portfolio suddenly appears terrifyingly large and risky. The external environment alters your perception of the same underlying risk.
Value Research's analysis of investor behaviour confirms this pattern: search interest in equity markets spikes after periods of high returns and plummets during corrections. While emotionally understandable, this reaction is financially counterproductive, often leading to buying high and selling low.
A Practical Framework to Anchor Your Strategy
So, how can you establish a stable risk level without letting monthly moods dictate your portfolio? Kumar advocates a goal-based, practical approach:
- Start with Goals, Not Products: Categorise your savings into buckets based on timeframes—emergency funds (0-3 years), medium-term goals like a car (3-7 years), and long-term objectives like retirement (10+ years). Your risk appetite for each bucket becomes clearer instantly.
- Stress-Test Your Feelings: Ask yourself a brutally honest question: If my equity holdings fell 20-30% and stayed down for a year, would I (a) lose sleep but hold, (b) continue SIPs while cursing my luck, or (c) redeem everything and swear off stocks forever? Your answer defines your true risk tolerance better than any generic questionnaire.
Kumar emphasises that at Value Research, their suggested equity-debt split considers this behavioural reality. If the numbers indicate you can and should take more risk, but your psychology cannot handle it, they won't recommend an 80% equity portfolio. A 60% equity allocation you can maintain for 20 years is superior to a 90% allocation you abandon in three.
Finally, he advises that your risk level should evolve with your life stage, not with the market index. Young professionals with time and future earnings can withstand more volatility. As you approach a specific goal, like a child's college admission in three years, you should systematically reduce equity exposure, regardless of a booming market. The goal doesn't care about your bravery; it only requires the money to be available when needed.
The ultimate takeaway? Decide your risk level on a calm day, based on your life circumstances and goals—not on market headlines. Write it down as a formal asset allocation (equity vs. debt), and let that plan guide your choices. Don't increase equity just because the index hits a new high, and don't dump it in a panic during a new low. Markets will always be moody. You don't have to be.
