There are two factors to consider when we want to determine how much risk we should take:
- ability to take risk and;
- willingness to take risk.
The following distinctions are noteworthy:
Ability to take risk is the financial capacity of an individual or a company to take risk.
Willingness to take risk is the approach towards taking a risk.
Need to take risk arise only if financial goals are not being fulfilled with limited resources. On the other hand, if there is sufficient capital to meet financial goals, then there is no need to take risks.
Based on these factors and risk profiling of a client an investor can be broadly classified as:
One who is willing to take risks so that he can achieve a higher level of return. Such investors are more comfortable with fluctuations in their investments over the short to medium term.
An individual looking for stable growth in excess of those provided by conservative funds. He is willing to tolerate fewer fluctuations in exchange for more reasonable returns, but is still comfortable enough to invest more aggressively than a conservative investor.
One who looks for stability when it comes to investing and is much more concerned with protecting his capital. Thus, he is less likely to be comfortable with any fluctuations in his investments and is more willing to accept lower returns in exchange for capital preservation.