Time, energy and money are usually limited in life. Therefore, it is essential to strategize and prioritize in order to make the best utilization of them.
Just as daily tasks have allocated time slots, similarly you need to have a slot in your life to manage and grow your money. It’s easier to do this if you are aware of your portfolio.
An investment portfolio is consolidated record of all your assets, which define your net worth. It includes stuff like stocks, bonds, real estate, gold, cash equivalents etc.
Your portfolio is not a static number – Its dynamic and changes over time as your needs vary and your assets grow.
Since each asset class has varying risks, structuring your investment portfolio with the right mix of risk adjusted assets is central to your aim of meeting your financial goals.
How to structure your portfolio?
1. Firstly, being aware of when and how much money you will need will help you get started.
Long-term focus: When you’re saving for a long-term goal, time can smoothen the returns from volatile investments. If you are investing for the long-term, you should allocate more towards equity and real estate in your portfolio.
Short-term focus: If you’re saving for a short-term goal, like buying a car, volatile investments may work against you, sometimes plummeting right before you need the money. Investment in fixed deposits and bonds is recommended.
Watch out for inflation. Retirees or anyone dependent on a fixed income needs to worry about the damage that inflation can inflict on both buying power and income (E.g. regular interest from bonds may fluctuate) Rentals from real estate as well as a healthy dose of stocks can help moderate the impact of inflation.
2. Create a portfolio after considering your risk tolerance.
Investing involves risk. All investments involve some risk, even seemingly safe investments like large cap stocks or government bonds. If you need some money for a short-term goal and you cannot afford to lose a penny of it, put it into a fixed deposit or a liquid fund.
No pain, no gain. Riskier assets—such as mid-cap and small cap stocks—tend to have greater returns over time, but can also have violent swings. These investments are suitable only if you are comfortable with high short-term volatility.
Here are a few scenarios, which can help you understand how to structure your portfolio investments for specific goals and at an overall portfolio level.
Scenario 1: Planning to buy a car in two years time.
Asset category | Conservative Investor | Moderate Investor | Aggressive Investor |
Fixed deposit | 60% | 50% | 40% |
Liquid bond | 40% | 40% | 40% |
Short-term bond | 0% | 10% | 20% |
Total Portfolio | 100% | 100% | 100% |
So if you are planning to buy a car in the next 2 years worth Rs 5 lakhs and are a conservative investor, you should put 60% or 3 lakhs in a fixed deposit and 40% or 2 lakhs in a liquid fund. Scenario 2: Saving for child’s college expenses (five years from now).
Asset category | Conservative Investor | Moderate Investor | Aggressive Investor |
Short-term bond | 70% | 60% | 50% |
Medium-term bond | 20% | 20% | 30% |
Short-term bond | 10% | 20% | 20% |
Total Portfolio | 100% | 100% | 100% |
Scenario 3: Saving for your own retirement (twenty years from now).
Asset category | Conservative Investor | Moderate Investor | Aggressive Investor |
Fixed deposit | 80% | 60% | 40% |
Liquid bond | 20% | 30% | 40% |
Large-cap equity | 0% | 10% | 20% |
Total Portfolio | 100% | 100% | 100% |
These are general guidelines and will vary based on individual specifications.
Prudent investment allocation can help you ride out the ups and downs of long-term market performance. No single asset class will outperform another consistently and no single investment allocation strategy may be right for everyone. Some investments may be up while others may be down helping minimize the overall potential impact of market decline and enable you to reach your goals smoothly.
That’s why its better discuss your portfolio with a financial planner or advisor to arrive at the optimal breakup based on your individual needs and requirements.