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Basics of building good portfolio

This article lists out some investment avenues you can park your funds in

 
   A portfolio of investment instruments is simply classifying your investments into various categories and knowing more about them in order to take the right decisions at the right time. Every individual invests and saves in his earning lifespan. However, informed and a proper choice of investment instruments is very important to make your investments work as hard as you do and earn decent returns.


   There is no right or wrong time to start building your investment portfolio. It is important to note that working on your investment portfolio is an on-going process. You cannot have everything you need in your portfolio on the first day. You have to build it slowly with time and focus on diversification of instruments in your portfolio.

Identify goals    

The first important step is to identify your various needs and risk appetite. This helps in judicious allocation to various types of investment instruments. The needs can be classified into immediate needs, mediumterm needs and long-term needs. Immediate needs include requirement of liquidity, tax savings, insurance etc, while medium and long-term needs include requirement of funds at a later stage in life like buying a property, marriage, children's education, retirement etc.

Risk appetite    

Risk appetite shows the capacity of an investor to bear losses related to his investments. Risk appetite is unique for each investor as it depends on various personal factors such as age of the investor, earnings stability, financial condition of his family etc. It is important to understand the risk appetite to decide on the allocation in your investment portfolio to high risk and high returns instruments as against the low risk and low returns instruments.


   These are some of the broad categories of investment instruments that are available in the markets. One should invest in different instruments to meet his personal needs as well as to optimise returns:

Tax-saving instruments    

The tax-saving instruments come under immediate needs as they save immediate tax burden. However, most of these tax-saving instruments come with a long lock-in period. Individuals can get a rebate in income tax by investing in certain categories of investment instruments. For example, provident funds, NSCs, infrastructure funds etc.


   Since income tax drains a significant portion of an individual's hard earned income, one should look at investing in various tax-saving instruments.

Insurance    

Analysts suggest that an investor should have an insurance or life cover of at least 5-8 times his annual income. Life insurance is available in term plans and endowment plans. One should also look at a balance between the term and endowment plans to optimise the premium and risk cover.


   Insurance schemes taken at a lower age come with smaller premiums and therefore it is advisable to go in for insurance covers early in life and career. Investors should also take adequate health insurance cover for themselves and the family.

Debt instruments    

Debt-based investment instruments come in the category of low risk and low returns investments. Debt instruments are good for the short and medium-term investment planning. There are various classes of debt-based investment instruments available in the market. For example, deposit schemes (bank fixed deposits, post office deposits, company deposits), debt mutual funds etc.

Equity-based instruments    

The equity-based instruments come in the category of high risk and high returns investments. Investors can invest in the equity markets through direct investments in stocks or indirect investments through equity-based mutual funds. Only investors who have time and understanding of the markets should look at the direct investment method. Others should look at investments through funds managed by various fund houses.

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