Here are some tips to help you put together a portfolio for wealth creation
With most asset products failing to offer the expected returns, investors have begun to wonder what the right investment approach to building a portfolio is. The choice of product depends on the risk appetite of the investor and tenure of investment. It takes a mix of various products in the current environment to build a good portfolio. The task is probably easier for a fresher. It is quite challenging for an investor with a short-term outlook. For instance, if an investor is bracing himself for a corpus creation by 2010, it could leave him with little choice as he has an uncertain one year ahead for his wealth creation and would be poorer by a good 25-30 percent (depending on his period of accumulation) in his wealth.
With the current year likely to unfold some more pain before bottoming out, the current environment also offers some lessons for building wealth in the coming years. Investors who have been unlucky by not participating in many bull runs in various assets, can strategise in a better way for the future.
Buy low and sell high
The golden principle was almost forgotten in the last five years, largely because of unprecedented buoyancy in various instruments. Much of it was also because of the liquidity flow from domestic and overseas investors. With liquidity drying up and economic growth sliding down, the prices have been relentlessly tracing backwards with respect to most instruments.
While the picture may look gloomy and offer less conviction for investments, long-term investors need to use the current environment to buy. After all, those who buy cheap and sell high are the ones considered smart over a long period of time.
While buying at a low is crucial, selling it at a high is an equally important component of wealth creation. The exit strategy could revolve around the market prices of your instruments, your liquidity needs or your allocation for a particular product. For instance, an allocation of 20 percent of your portfolio in favour of equity could go haywire during a market boom in equity and may account for 40 percent of your wealth. One of the options at such a juncture is to re-balance the portfolio by booking profits from equity and transferring them to debt or by increasing the debt allocation with the surplus funds.
Not only will such a strategy help in meeting your goals but will also ensure profit-booking which is an essential component of investment planning. On the other hand, the task of wealth creation can also be achieved if you have a long tenure at your disposal. In this scenario, risk management would be built into the investment process, as you would be staggering your investments, which in turn helps you in averaging out your costs.
Investment discipline
Another important component of the accumulation strategy is sustained focus and discipline. These are necessities though you need not stick to the same set of products at all times. For instance, if you have signed up for a systematic investment plan (SIP) in a small cap fund for a period of five years, you can reduce the allocation in the current environment to that fund and shift it to a large-cap fund. In fact, large-cap stocks or funds would be the safest bets for a long-term portfolio as they have the ability to sustain in market volatility in a better way. On the other hand, mid-sized and small companies offer the potential to beat benchmark indices, despite carrying some risk. Irrespective of the choice of stock or mutual fund, no wealth creation is complete if you do not have the habit of monitoring the investments at regular intervals. With professional help being easily accessible, the task has become a lot easier.
With most asset products failing to offer the expected returns, investors have begun to wonder what the right investment approach to building a portfolio is. The choice of product depends on the risk appetite of the investor and tenure of investment. It takes a mix of various products in the current environment to build a good portfolio. The task is probably easier for a fresher. It is quite challenging for an investor with a short-term outlook. For instance, if an investor is bracing himself for a corpus creation by 2010, it could leave him with little choice as he has an uncertain one year ahead for his wealth creation and would be poorer by a good 25-30 percent (depending on his period of accumulation) in his wealth.
With the current year likely to unfold some more pain before bottoming out, the current environment also offers some lessons for building wealth in the coming years. Investors who have been unlucky by not participating in many bull runs in various assets, can strategise in a better way for the future.
Buy low and sell high
The golden principle was almost forgotten in the last five years, largely because of unprecedented buoyancy in various instruments. Much of it was also because of the liquidity flow from domestic and overseas investors. With liquidity drying up and economic growth sliding down, the prices have been relentlessly tracing backwards with respect to most instruments.
While the picture may look gloomy and offer less conviction for investments, long-term investors need to use the current environment to buy. After all, those who buy cheap and sell high are the ones considered smart over a long period of time.
While buying at a low is crucial, selling it at a high is an equally important component of wealth creation. The exit strategy could revolve around the market prices of your instruments, your liquidity needs or your allocation for a particular product. For instance, an allocation of 20 percent of your portfolio in favour of equity could go haywire during a market boom in equity and may account for 40 percent of your wealth. One of the options at such a juncture is to re-balance the portfolio by booking profits from equity and transferring them to debt or by increasing the debt allocation with the surplus funds.
Not only will such a strategy help in meeting your goals but will also ensure profit-booking which is an essential component of investment planning. On the other hand, the task of wealth creation can also be achieved if you have a long tenure at your disposal. In this scenario, risk management would be built into the investment process, as you would be staggering your investments, which in turn helps you in averaging out your costs.
Investment discipline
Another important component of the accumulation strategy is sustained focus and discipline. These are necessities though you need not stick to the same set of products at all times. For instance, if you have signed up for a systematic investment plan (SIP) in a small cap fund for a period of five years, you can reduce the allocation in the current environment to that fund and shift it to a large-cap fund. In fact, large-cap stocks or funds would be the safest bets for a long-term portfolio as they have the ability to sustain in market volatility in a better way. On the other hand, mid-sized and small companies offer the potential to beat benchmark indices, despite carrying some risk. Irrespective of the choice of stock or mutual fund, no wealth creation is complete if you do not have the habit of monitoring the investments at regular intervals. With professional help being easily accessible, the task has become a lot easier.
