Most investors make this common mistake. They start off keeping a plan in their mind. But when it comes to its execution, they lose track of what is their purpose of investment.
Before you move on to investing in debt and equity assets, make sure you pen down what is your purpose for investing. Is it for financing the purchase of your dream home without going for a home loan in the next 5-10 years or is it for post retirement needs where you do not want to depend on your children or opt for a personal loan to finance your needs. Once you state your financial goals and responsibilities, it becomes easy for you to link your investments with your goals.
When structuring your portfolio, it is important that you diversify your assets. Ensure that you do not save all your money into one assets and evaluate each fund’s pros and cons prior to investing. Although it is important to have fund cap of all sizes; small, medium, large, hybrid etc., it is also important to adopt a ‘core and satellite approach’. The core-satellite approach to portfolio construction uses index funds as the stable ‘core’ of the portfolio, with carefully selected lowly correlated active investments as the ‘satellites’. If you are looking for long term wealth creation, this is what is required. Your balance of large cap and large and mid cap funds constitute your core funds. The mid cap, mid and small cap and multi cap funds constitute the satellite funds. You should invest about 70-80% of your funds in the core category and the rest in satellite funds.
This can provide you stability in the long term, as all the components in the portfolio are in a position to absorb the shocks of the market, provide a good performance record across all market cycles and guarantee you the returns you expect out of a robust portfolio.
Make sure that you opt for a Systematic Investment Plan (SIP) route and diversify your portfolio of not more than 5 funds. Focus on your goals and responsibilities by which you shall not deviate away from them.