How to create your investment portfolio?

How to create your investment portfolio?

by 5paisa Research Team Last Updated: Jan 13, 2022, 12:59 PM IST

Articulating an investment portfolio is an important aspect in order to receive optimal returns.

The world of investments is growing at a faster pace with an awareness of investment planning. We all make investments to get returns/rewards from the investment vehicles. The objective of the investors is to maximise expected returns, although they are subject to risks. It would make sense that we utilize a plan to help guide our decisions. Taking some time to put together a financial plan can reap optimal benefits by taking risks into account. Without a proper investment plan, one cannot reach his goals and objectives.

Financial planning provides direction and meaning to one’s financial decisions. It allows one to understand how each financial decision affects other areas of finances. For instance, buying an investment product might aid you to pay off your loans faster. By viewing each financial decision as part of a whole, one can consider its short and long-term effects on life goals. One can also adapt more easily to life changes and feel more secure that goals are on track.

To formulate an investment portfolio, one should first know his needs thoroughly. There are various investment objectives such as buying a house, car, children’s education, retirement, and many more. One should consider all his objectives and go further to formulate this portfolio according to his needs. He needs to park some funds for the short term some for the medium term and some for the long term as per his goals and objectives. The second parameter that arises is the risk you are willing to take. According to your risk appetite, an investment instrument should be chosen.

Some other economic factors that point towards the risk profile of an individual are as follows:

  • Liquidity: A high concern for liquidity will imply a more conservative approach.

  • Income: Many investors would prefer to have an income flow on all their investments and too preferably guaranteed returns. This again is a conservative approach.

  • Inflation: A lower concern for inflation means more exposure to debt/ income-oriented investment and less to growth.

  • Taxation: A high concern for taxation will mean higher exposure to tax-saving, growth and equity-oriented instruments where the incidence of taxation is lower compared to debt/income-oriented instruments.

  • Volatility: Some investors are very concerned about the loss of capital – that would mean that even a stock portfolio should contain more defensive and largecap stocks - lower on risk and return.

After having assessed your needs and risk the next step is deciding on an asset allocation plan that shall best serve your needs. Basically, financial assets are equity and debt-oriented. Equity investment can be done through investing directly in stocks of the company or through mutual funds. Whereas investment in debt or fixed income instruments can be done through debt mutual funds, government-backed schemes, bank fixed deposits, etc.

An individual with a higher risk appetite can have a higher proportion towards equity and a lower proportion towards debt, moderate risk taker individual can invest half of its assets in equity and half of its in debt and lastly, a conservative investor can invest a higher proportion towards debt and lower proportion towards equity.

Investment Vehicle   

High Risk Taker   

Moderate Risk Taker   

Low Risk Taker   

Equity Instruments   

70%   

50%   

30%   

Debt/Fixed Income Instruments   

30%   

50%   

70%   

The following table depicts an example of asset allocation:

Once the asset allocation is finalized the next step is selecting the right products under each asset class. After finalizing the list of securities or actual investment plan, the individual should proceed further to implement the same by parking his funds in those investment instruments.

And lastly, the very important step in the investment process is monitoring and reviewing your plan. It is a critical step to the success of an investment plan as selecting the right securities and going ahead with the right mix of assets.

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