While building an investment portfolio, it is important to keep track of asset allocation.
Contrary to popular belief, investment portfolios need not be a complicated thing. If one’s financial goals are clear, it is possible to build a simple and effective portfolio. Every industry has its own jargon and investing is no different. In financial world investing portfolio denotes total invested assets of an investor.
If you are starting investment for the first time, the term investment portfolio might sound intimidating. However, with little efforts and right guidance, the entire process can be simplified. With right guidance from the financial advisor, the entire investment process can become a breeze.
What is an investment portfolio? To define broadly, an investment portfolio is the collection of assets that an investor might have. It includes stocks, bonds, real estate, gold etc. Investment portfolio categorises the investment assets under one roof.
For example, an investor might have regular savings in a provident fund, aside from that he might have investments in mutual funds. These accounts need to be looked at collectively while making investment decisions.
The best way to efficiently manage an investment portfolio is to hand over its management to a professional financial advisor.
Many people invest haphazardly. They do not have clear investment goals. This is wrong. One must consider his risk tolerance while building his portfolio. For many risk tolerance is an alien concept, but professional financial advisors consider it as an important factor while weighing investment decisions. Risk tolerance helps the investor to assess his ability to handle volatility. For example, if one is investing for retirement it does not make sense to react to volatility. The markets can witness wild swings in the short term, but in the long run the gains and losses are evened out.
Once risk is identified, the next step is to identify investments. For someone having his goal five years away, it makes sense to invest in debt funds due to stability of returns. Similarly, someone who is young can opt to invest in riskier assets like pure equity funds.
While building an investment portfolio, it is important to keep track of asset allocation. Many investors, in their enthusiasm, invest everything in short term assets and panic during volatility. It is crucial to determine how much to invest in each asset class in order to maintain peace of mind. Each investment must be made after carefully analyzing one’s financial goals.
Investment portfolios can be aggressive, conservative or a mixture of both. It is not enough to create an investment portfolio. It is important to rebalance it at periodical intervals. The sharp rise or fall in asset prices can disrupt the proportion of your portfolio. Most of the financial advisors advocate rebalancing the portfolio every six months or at least once in a year. For example, if you have decided to allocate 60% for equity funds, and if the markets rise by 5%, it makes sense to divest some holding and shift to debt or international funds. This ensures that the portfolio does not rely excessively on one asset class.
Finally, though building a investment portfolio is not a rocket science, it is always advisable to seek guidance of a qualified financial advisor to avoid frustration later on.
(By Abhinav Angirish, Founder, Investonline.in)