How to create the best investment portfolio?

Dear Friends,

Investment is very important but even more important is investment with an objective to create a balanced portfolio. If you invest in haphazard way it will give you serious troubles at times when the asset in which you are investing is not giving a good return.

For example : If you are very aggressive investor and keep investing all your money in Share market and do not make investment in FD or other debt instruments , then you need to depend on market to be on high to get a decent return. You cannot withdraw your money anytime. You need to time the market and it is very tricky.

Second scenario, you are very conservative investor and you invest all you money only in FD. Then the biggest loss you will have is you will get a meager return in actual terms. With an average inflation of 5%, your FD giving a return of 7-8% actually gives you 2-3% of return. And if your total interest income is more than Rs. 10000 in a financial year then you need to pay tax on interest earned as per your tax slab.

To overcome these problems we need to do a systematic asset allocation.

You need to find out what is your risk taking ability. If you are already not sure, you need to give a true answer to yourself to find out your risk taking ability.

Question 1: You are an investor in Equity market. After recent “Brexit” Share market has lost more than Rs. 2 lakh crore in a single day and your investments are down by 30% of its total value. What will be your reaction?

Options:

 A) You are tempted to invest more to buy the shares at a discounted price.

            B) You do not care to take any action and will leave the way it is.

            C) You panic and sell all your shares to save whatever money you can.

If your answer is

A, then you are an aggressive investor.

B, Then you are invest and forget kind of Moderate investor.

C, Then you are very conservative investor.

With this I assume,

·          An aggressive investor will have a high risk tolerance ability.

·          Moderate investor will have moderate risk tolerance ability.

·          And, Conservative investor will have a low risk tolerance.

Asset allocation strategy for an Aggressive investor

Aggressive investor should have a mix of investment in Real estate, Equity based mutual funds, Direct Equity investment, Debt instruments and Gold. Your portfolio should be tilted in Equity based Mutual funds and direct equities. If you are not comfortable with direct equities you should invest that portion also in the Equity based mutual funds.

A good mix of asset allocation for you is as shown below

        

Asset allocation strategy for a Moderate investor

A Moderate investor is one who is among the most balanced investor. If you fall in this category you should diversify your allocation in Mutual funds, Equities, Debt instruments and Gold.

Equities will give you a chance to grow your money where as Debt and Gold will give you a shield against the volatility of Equity market.

A good mix of asset allocation for you is as shown below

Asset allocation strategy for a Moderate investor

A Conservative investor is the one whose primary aim is to safeguard his/her investment and then earn a return which is slow yet steady.

You need to be more focused on Debt instruments like Fixed deposits, Recurring deposits, PPF, NSC, etc. This will give you a certain fixed return. Along with this you need to diversify your portfolio by investing 10% in Gold and 20% of your money in Equity mutual funds. Mutual funds will give you a decent return and it is relatively safer than direct equity investment.

A good mix of asset allocation for you is as shown below

Hope this post will help you all to understand the importance of asset allocation. Keep saving, keep investing!