How to articulate an investment portfolio?


Investment decisions made today affect our future wealth. It would make sense for us to use a plan to help guide our decisions. Surprisingly, the majority of people don’t have an investment plan in place. Taking the time to develop a financial plan can reap huge rewards.

Financial planning provides direction and meaning to a person’s financial decisions. It helps to understand how each financial decision affects other areas of finance. For example, buying an investment product can help you repay your loans faster. By viewing each financial decision as part of a whole, one can consider its short-term and long-term effects on life goals. One can also adapt more easily to life changes and feel more confident that goals are on track.

To articulate an investment portfolio, you must first understand your needs. There are various investment goals such as buying a house, a car, educating children, retirement and many more. You have to consider all your goals and go further to formulate this portfolio according to your needs. He needs to park funds for the short term, others for the medium term and others for the long term according to his goals and objectives. The second parameter that arises is the risk you are willing to take. Depending on your risk appetite, an investment instrument should be chosen by you. Some other economic factors that point to an individual’s risk profile are:

  • Liquidity: A high concern for liquidity will imply a more cautious approach.
  • Income: Many investors would prefer to have an income stream on all their investments and preferably guaranteed returns. Again, this is a conservative approach.
  • Inflation: Less concern for inflation means more exposure to debt/income oriented investments and less to growth.
  • Taxation: A strong concern for taxation will mean greater 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 – this would mean that even a stock portfolio should contain more defensive and large-cap stocks – less risk and return.

After assessing your needs and risks, the next step is to decide on an asset allocation plan that will best meet your needs. Basically, financial assets are focused on stocks and debts. Equity investment can be done by investing directly in shares of the company or through mutual funds. While investment in debt securities or fixed income securities can be done through mutual funds, government guaranteed schemes, fixed bank deposits, etc. An individual investor can invest half of his assets in equities and the other half in debt and finally, a conservative investor can invest a higher proportion in debt and a lower proportion in equities.

For example, the following table illustrates an example of asset allocation:

Investment vehicle

high risk taker

Moderate risk taker

Low risk taker

Equity instruments

70%

50%

30%

Debt securities/fixed income securities

30%

50%

70%

Once the asset allocation is finalized, the next step is to select the right products in each asset class. After finalizing the list of securities or the actual investment plan, the individual should proceed with its implementation by securing their funds in these investment instruments.

And finally, the very important step in the investment process is monitoring and reviewing your plan. This is a critical step to a successful investment plan because it involves picking the right stocks and moving forward with the right mix of assets.

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