Assessment of risk tolerance level of Indian individual equity investorsAn empirical analysis

Abstract

Return and risk are part of investment decision. The relationship between risk and return is direct with higher returns associated with higher risk while lower risk will mean lower returns. Many Investors are clueless about their natural ability to take risk and their disposition towards facing risky prospects. Investors may not differ in their objectives and knowledge about their investments, however differ significantly in their propensity to take risk or tolerate risk present in their investment decisions. Thus, risk tolerance is a crucial aspect of the shrewd art of investing. The present paper traces various financial Risk Tolerance Assessment methods and presents the dynamics and intricacies of each method to assist the equity investors who undertake high investment risk. Further, it scientifically assesses the financial risk tolerance level of Indian Equity investors. The equity investors are profiled into five categories: Low risk, Below average risk, Moderate risk, Above average risk and High risk tolerance based on responses to questions characterising investment decisions. This empirical study on Indian investors has some profound implications for equity investors, investment managers and brokerage firms. The investment product designers can design array of products which can cater to the investors who can incur low and moderate as majority of the Indian equity investors’ are found to be moderate risk takers. The brokerage firms also can advice their clients in choosing less volatile stocks based on their ability and willingness to take risk.