Building a balanced portfolio

The first rule of the game is gauging the risk tolerance which will ultimately help in allocating assets towards various investment options. Factors which generally govern risk tolerance are age,current income and expected growth,current and anticipated financial commitments and the tax bracket you fall into. Please refer to the table above to figure out your risk tolerance.

Building It

A balanced portfolio has the following characteristics.

Shields against worst case scenario

Constant cash flow

Potential for capital Preservation

Potential for capital Appreciation

Requires Minimum Monitoring

As you have researched your risk profile,expected return and economic condition by now,let’s start building the actual portfolio by identifying investment avenues that fulfil the above conditions.

Insurance: Buying insurance should be the very first option,as this is the instrument which acts as the saviour in unforseen circumstances. It also helps in saving tax if chosen prudently. You can buy life insurance,general insurance or can take an exposure using the ULIP (Unit Link Investment Plan) route. This is a combination of mutual funds and insurance offered by various life insurance companies.

Debt Investment: Every investor needs constant cash flow. Investing in debt instruments fulfills this need. If you are watchful and invest around the peak of the interest rate cycle,you can very well fight inflation too. In times of economic downturn shifting to debt investment will help in capital preservation plus constant cash flow. The options available here are investments in fixed deposit,public provident fund,KVP,NSC and infrastructure bonds.

Equity Investment/Real Estate/Land: To reap the benefits in good market conditions you need to invest in instruments like equity and mutual funds which grow with the economy and generate returns,which are way above debt investment returns. The investment options available here are individual stocks,mutual funds,Equity linked saving schemes,ETFs,commodities and gold.If you want to reduce the monitoring effort and you have a long term investment horizon you can invest in real estate and land too.

All said and done if you want to create a really stable portfolio,it is a really good idea to make an effort to learn all you can about the various techniques of investing and all the available investment options. Here,it really pays to be Jack of all trades and master of none.

— Author is CEO,Bankbazaar.com