Make Smarter Financial Decisions with Investor Profiling

To a non-expert, financial terms can come across as complex and difficult to understand. Money, however, is something everyone deals with, and understanding how to make the best of it is of utmost importance. Citi aims to simplify investing so that anyone can get started. The demystifying wealth series breaks down investment concepts and arms readers with the right information to make savvy investment decisions.

In this article, we’ll be discussing investor Profiling.

The Role of Risk in Investment

When it comes to investments, there is usually a trade-off between earning a higher return and having a lower chance of losing money. For instance, investing in government bonds is considered relatively low-risk but the returns are typically not as high as stock market investments. While it is unlikely that you will lose money in government securities, a market linked investment suitable for you can earn you higher returns and the wrong one can lose you money. Risk tolerance refers to an individual’s willingness to take on risk while risk capacity is the ability to take on risk. Risk capacity depends on quantifiable factors such as age, income, current assets, liabilities, etc. Risk tolerance, on the other hand, is more about an emotional tolerance towards risk. Both factors vary by individual and play important roles in determining investor profiles.

What is Investor Profiling?

Also referred to as risk profiling, investor profiling is the practice of classifying investors by their willingness and ability to take on risk, i.e. by their risk tolerance and capacity. On one end of the spectrum, risk-averse individuals have a low tolerance for risk and are willing to forgo potential capital appreciation to avoid losing money. Risk seekers, on the other hand, are willing and able to take on high levels of risk for the possibility of high returns. Investors usually fall somewhere between this spectrum and investor profiling is simply the process of determining where an investor falls on the scale.

So, why is all this important?

The Power of Profiling

Similar to how investors are profiled, investment products are also rated for their riskiness. Savvy investors and investment managers aim to match investment products to risk profiles. They analyze risk-bearing ability, investment goals, and available time frame, and then find the right products that fit these criteria. Doing this puts the investor’s comfort and goals at the forefront of investment decisions, and ensures the right balance in allocation of assets.

What is my Investor Profile?

The process of determining an investor’s profile usually begins with a simple questionnaire comprising questions such as age, assets, liabilities, income, occupation, educational qualification, investment time horizon, risk tolerance, risk attitude, investment objective and knowledge and experience in various financial products. Your answers are used to determine your investor profile and assign you a rating. This rating usually ranges from 1 to 6, with 1 being the most conservative and 6 being the most aggressive. It is important to note that there is no “good” or “bad” rating; rather these ratings are simply indicators of how comfortable you are investing in products with varying levels of risk and return.

Keeping Your Profile Updated

If you invest in products that do not match your profile, you may be putting too many or too few eggs in the wrong baskets. This can lead to an imbalance in your overall asset allocation, poor investment returns, and zero peace of mind. Think of your investor profile as the equivalent of a driver’s license; you don’t begin driving without one, and you make sure it is constantly renewed. In the same way, your investor profile should be reassessed periodically to ensure that your portfolio is in line with your appetite and objectives at any given time. This way, you can rest easy knowing that your investment portfolio is tailored to you.

Ready to figure out your investor profile and start investing? Investment managers at Citi are on standby to help you get started. Click here to create a new investor profile or update your existing one through our mobile banking application or click here to complete it through our Citibank online web portal. If you need assistance, you may also reach out to your Citigold relationship manager.