Building an Investment Portfolio: A Step-by-Step Guidance
Making investments is a crucial part of having an effective financial plan. With inflation eating up on your savings, it becomes all the more important to invest your hard-earned money into assets that give you positive returns over the long run. This is where having a strong investment portfolio can help.
In this world of constant rush, how can your money sit idly? Put it to work, and earn significant wealth from it!
“Investments help in building up on the already saved money.”
You can check our article on How to Invest Money to Make Money Like a Bank?
There must have been whispers about losing money in the stock market, scams, and whatnot. However, that is a result of not having an investment portfolio, lack of planning on diversification.
Investing your money should not be confused with investing in stock markets. There are a bunch of asset classes that one needs to consider to have a balanced & best investment portfolio, that hedges against the loss from any one asset class.
How can that be done? This is what this post will cater to in the subsequent sections.
Considering the number of avenues present for investing, it might get confusing at times. To counter such problems, one needs to curate a balanced portfolio to get the maximum return at all times.
Let’s start by looking at what an ideal investment portfolio should look like.
What is an Investment Portfolio?
An investment portfolio refers to a basket of investments made in a mix of various financial instruments, be it the traditional ones, like stocks, bonds, or gold, or the alternatives like real estate, P2P lending, etc. The portfolio is crafted as per the risk appetite and desired stability of the investor.
An investment portfolio helps in securing the current position of the investor while simultaneously allowing them to earn significant returns on the investment. As a result, an investor can better manage their retirement plans amongst other goals, without risking their position.
But to achieve optimal utilization of the investments, a step-by-step process must be followed. The very first question one needs to ask is what his financial goals, needs, or wants are.
Why are you Investing?
It must be noted that the investor should have clearly defined goals while investing. Financial planning involves the ascertainment of short-term, medium-term, and long-term goals for dividing the investable amount among the three.
Short-term goals may include saving up for a vacation next month, or a debt repayment over the next six months. While medium-term goals may include paying off credit card debts, undertaking a certificate course, buying a new motorbike, etc. Lastly, long-term goals typically have to do with your aspirations for your life. These may cover saving up for your kid’s college or retirement. Once the investor has identified the time and needs for money, it becomes easier to demarcate the avenues in which investment needs to be done.
It is a universal fact that every investment encounters either minimal or substantial risk, but an investment portfolio helps in identifying the risk tolerance and hence selecting the avenues according to your needs, age, requirements, and goals.
Age is an important factor in determining your investment choices. Increasing age is typically associated with increasing responsibility and changes in financial goals. Your investable corpus may also change as you grow up your career ladder. Subsequently, you need to accommodate your changing needs in your investments. It is always advisable to start investing at an early age.
Choosing the Right Asset Class for investment
At the outset, there is no “perfect” or “right” asset class universally. What is right for one, may not be so for another. This is why the perfect asset for you to invest in is the one that matches your financial goals and risk tolerance.
Ideally, you should be able to find a balance of multiple assets with different weightage so as to maximise your returns, while hedging your risks. Your selection of an investment avenue must depend on your financial goals, and when you hope to achieve them.
Check out our guide on What Is Diversification? Why diversifying your investment portfolio is the best strategy?
The first step to building the best investment portfolio will be to set aside a good portion of your income as savings for an emergency fund. An emergency fund should be enough to sustain you for a considerable period in case of an unseen layoff or any other emergency. The best way to build up an emergency fund is to invest it in instruments that are fairly liquid, but give you returns at least at par with inflation, if not higher rates. As a rule of thumb, you should at least have enough savings to sustain your living expenses for three to six months.
Once, the bare minimum is ensured, you should look to make investments based on your needs. For example, you could invest in fairly risk-free asset classes like bonds in case you are risk averse and want decent returns on your investment. Ideally, investments like bonds would help you ensure that your principal amount is loss-free. While Government Bonds offer relatively lower risk and lower returns, corporate bonds can offer up to 8-10% average annual return.
Stocks, Mutual Funds, and ETFs
If you aspire for higher returns, the stock market is a time-tested avenue. NIFTY 50, for example, has given an annual average return (CAGR) of around 12% over the last 15 years. Depending on your aspirations and active involvement, you can either look for mutual funds, including index funds that reciprocate the indices, Exchange Traded Funds (ETFs) or you can create your own portfolio of stocks, diversifying your allocation across blue-chip companies, mid-caps, and small-caps.
ETFs have recently gained popularity owing to their diversification and liquidity benefits. The Asset Under Management (AUM) of Indian ETFs has increased by over 69% from 2021 on a year-on-year basis. As of December 2021, the total AUM for ETFs in India stood at Rs 4,03,705 crore.
Investing only in the stock market is not at all advisable though, considering the frequent downturns in stock performances. Stock price volatility was reported at a high of 20.59% in India in 2021. Given the volatility, you need to diversify into fairly less volatile asset classes as well. At the same time, you may want to explore assets that offer even higher returns. This is where alternatives come in.
Traditionally alternative investments like high-value commercial real estate, startup equity, peer-to-peer or P2P lending, etc. were limited to high-networth individual investors or institutional investors. Things have changed now with investment platforms democratising these asset classes and making them accessible and affordable to the average investor. Backed by data, some of these assets have the ability to make significant returns over a period. While commercial real estate offers rental income and asset appreciation, startup equity can multiply your investment when the startup grows in value. P2P lending again offers regular interest income over fixed periods. Again, all these asset classes have their own risk, and a strategic balance has to be achieved between risks and rewards. Making informed choices is the first step to ensure that.
Alternatives such as real estate or P2P lending are also potential sources of regular cashflows in the form of rental or interest income. This gives you an additional income stream, that you can reinvest to make the most of compounding.
Benefits of Having a Balanced Portfolio
A well balanced portfolio is one that is diversified across asset classes, different sectors, and geographies. A balanced investment portfolio helps incorporate proportional sizes of different asset classes to minimise risk and get maximum returns. Here, investor discretion is necessary for assessing the risk appetite and connecting the same with the proportion of funds to be invested across asset classes.
For instance, a portfolio having exposure to both stocks and real estate can reduce the risks of wiping away investments when one of the two assets hit a slump. Real estate can provide stability over the long run, with sustained growth, while giving regular rental income.
Over time, as the needs or risk appetite changes, you must rebalance your investment portfolio accordingly. This calls for constant monitoring of the status of investments. Considering the retirement plans or tax planning, the investment portfolio should be rejigged accordingly.
Market volatilities and uncertainties with a particular asset class make it imperative to diversify across traditional and alternative investments and create what is called an investment portfolio.
As explained in the article, your investment portfolio should reflect your financial goals, aspirations for your life, and risk appetite.
Curating a strategically balanced portfolio will help you sail through market downturns while making you the most in a bull market. The idea is to lose the least while making the most. However, no investment portfolio is a sure shot over time, and one needs to monitor and adjust accordingly.
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