Types Of Investors

Conservative Investor:
a.Seeks modest returns:
Taking risks in young age is considered good. But a new investor who is cautious about investing may like a conservative investment at the early stage. Similarly, an investor who is retired or is nearing retirement, may want a steady stream of income. These investors are conservative by nature. Such investors count on income investing that seeks to minimize losses while earning a modest but steady annual return. They are willing to accept lower potentialreturnsinexchangefor a lower-riskinvestment. Such investors majorly invest in Government and high quality corporate bonds, blue-chip or large-cap dividend paying stocks, preferred stocks etc.

b.Focus on capital preservation:
The primary objective of conservative investment strategy is to prevent the loss and to preserve the capital. Since this strategy focus on providing a steady source of income and prevention of losses, the objective of preservation of capital is automatically achieved.

The Pareto rule of 80:20 can be used in a creating a moderately conservative portfolio. According to the rule, 80% of the portfolio assets can be placed in a lessvolatileinvestment, such as Treasury bonds orindex funds, while placing the other 20% in growth stocks. The 80% in the lower-risk investment will collect a reasonable return, while the 20% in the higher-risk assets will hopefully achieve greater growth.

c.Example: Low risk investment:
To beat inflation, everyone needs to invest. But investing doesn’t have to be a gamble. One can invest in a low-risk security and be a conservative investor. One of the most common go-to investments for most people who think of conservative investing are bonds. Bonds are debt instruments issued by companies or governments to finance projects or operations with the promise to repay the loan at a future date and pays interest on a monthly, quarterly, or semi-annual basis in return. They may also invest in blue-chip and large cap stocks. These companies usually pay large dividends that provides the investor with an interim source of income.

Aggressive investor:
a.Driven by high returns:
An aggressive investor is the one that attempts to maximise the returns by taking high degree of risk. It focuses on capital appreciation and growth rather than steady income flow or safety of initial investment. Calculated higher risks are rewarded with higher returns to an aggressive investor. It involves higher asset allocation in risky equity instrument and lower investment in fixed income generating securities.

Aggressive investing strategy is suitable for young investors who have longer investment horizons which eliminates the risk of short-term market fluctuations and sluggish markets.

b.Appetite of Volatility:
An investment’s risk in simple terms is the measure of its volatility. Higher the volatility in the prices of the security, higher is its risk. An aggressive investor invests most of its portfolio in stock markets and the investments that are subject to volatility. Hence, he/she tends to take high amount of risk in expectation of high amount of return in form of capital appreciation. Since, retirees and elderly people approaching their retirement count on a stable source of income and don’t have a high appetite of volatility, aggressive investing strategy is not suitable to their investment style.

c.Examples: High risk investments:
Aggressive investors majorly invest in equity instruments, commodities, junk bonds, option trading etc. The market price fluctuations of equity shares and commodity prices make these securities aggressive. Junk bonds, unlike government bonds, pay higher interest because of their poor credit ratings, and hence are used by aggressive investors as an investing option. Options trading are also used by some investors. This carries huge investment risks and has a potential for fast and huge returns.

For example, Javed has an asset allocation of 75:10:15 in equities, commodities and fixed income respectively. This is considered quite aggressive, since 85% of the portfolio is weighted to equities and commodities. However, it would still be less aggressive than the portfolio of Surya, who has an asset allocation of 85% equities and 15% commodities.