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What is an investment portfolio?
Investment portfolio is the pool of financial instruments or physical instruments that you buy from your savings or surplus money for mainly two reasons: –
- For Financing your long term needs or goals
- For allowing your money to grow.
What factors determine your investment portfolio?
As an individual you have your own goals and requirements in life. Creating investment portfolio is the most important part that would help you achieve your goal. To create your investment portfolio, you should consider following questions and decide for yourself what type of portfolio would suit you best: –
- Your long term goals : It is best to invest for your long term goals in the early stage of your career itself; this would allow you to plan your financials accordingly. Consider for example, you wish to buy a beautiful sea-side house 20 years from now and you require 500K for that, by doing reverse calculation, you would be able to figure out saving how much would require to make your dream come true.
- Your risk appetite : If you are a low risk taker and can not tolerate huge market swings, your portfolio would be more consistent of low risk assets.
- Your age : At young age you could take risks and invest for long term, but at a later stage of life, a more stable and safe income is advisable
- Your income : If you good surplus income you should invest for long term then you may consider taking some amount of risk, while if you do not earn substantial income, investments like government securities are advisable for your portfolio.
What are the financial instruments that form your investment portfolio?
The portfolio of an individual should consist of following financial instruments so as to provide good diversification and return on investment:
1) Equity Stocks : Equity stocks are the stocks of the companies that provide share of the company in proportion to your holding.
Risk Level: 5/5
Return Level: 5/5
Best Suited for: Long Term
2) Government Bonds : These are the bonds issued by government for the purpose of raising debt. This is the most secure type of investment, because the chance of government defaulting is almost next to zero. The return provided by such bonds are also very low compared to other securities.
Risk Level: 0/5
Return: 3/5
Best Suited for: Secure Income
3) Mutual Funds : Mutual funds are a good alternative for stocks you if you are not familiar with investing in stocks. They provide professional management of your money at a very minimal fee.
Risk Level: 4/5
Return: 4/5
Best Suited for: Medium to Long Term
4) Gold : Gold is a very good investment instrument for the purpose of diversification of your portfolio. Historically it has given good return for investment.
Risk Level: 3/5
Return: 4/5
Best Suited for: Diversification and Medium to Long Term
5) Corporate Bonds : These are the bonds issued by companies for raising debt. These bonds are rated by rating agencies like S & Ps & Moody's and based on which their return is decided.
Risk Level: 4/5
Return: 3/5
Best Suited for: Medium Term
6) Real Estate : This provides the portfolio with the required long term growth. Investing in real estate could require a lot of capital and hence for small investors mutual funds could be used for the purpose of investing in real estate.
Risk Level: 5/5
Return: 5/5
Best suited for: Long Term
Portfolio Designing Calculator: –
It is always advisable not to put all your eggs in one basket and since you should always diversify your portfolio as per your goals, needs, requirement and income. You could use this investment calculator developed by us for the purpose of investing and customize it as per your requirement:
The scores assigned to various parameters are: –
Your risk appetite: –
High risk taker: 3
Moderate risk taker: 2
Low risk taker: 1
Your age: –
18-30: 3
30-50: 2
50+: 1
Income surplus: –
Good savings: 3
Moderate savings: 2
Low savings: 1
Long term goal: –
Aggressive: 3
Moderate: 2
Simple: 1
Now based upon your scores your investment portfolio could look like this:
If your score is 10-12 , then your portfolio could look like this:
Stocks / Mutual Fund – 45%
Government Bonds – 20%
Gold – 20%
Real Estate – 15%
For score 7-9 :
Stocks / Mutual Fund – 40%
Government Bonds – 30%
Gold – 20%
Real Estate – 10%
For score 4-7 :
Stocks / Mutual Fund – -2%
Government Bonds – 50%
Gold – 15%
Corporate Bonds – 10%
Real Estate – 5%
For score 1-4 :
Stocks / Mutual Fund – 5%
Government Bonds – 70%
Gold – 5%
Corporate Bonds – 15%
Real Estate – 5%
The above composition is a generalized form of model portfolio; you could always customize the same based upon your understanding and requirements.
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