Knowing that you have additional sources of income is always something of a relief, especially when getting this income requires very little time and effort on your part. With the right investment portfolio, you could have a one-stop solution to build wealth beyond your regular income. It could speed up your journey to attain your financial goals. However, before you embark upon this journey to create an investment portfolio, there are a few things you should be aware of.
Here is a guide to creating an investment portfolio:
- Savings and investment are not synonymous
If you thought saving and investing meant the same thing, you were wrong. Savings are the unutilised part of your income. Only when you put your savings partially or entirely into an investment instrument, it qualifies as an investment. For instance, if you earn Rs.20,000 a month and you manage to save Rs. 8000, you might want to invest the entire savings amount of Rs. 8000 or you might want to invest only Rs.5000 a month in an investment product such as a Fixed Deposit, PPF, Mutual Funds, or ULIPs.
- Know your risk appetite
The next thing you should understand is your risk appetite. Assess your risk-taking ability before you pick an asset, as a high-risk investment avenue (such as stocks) has the potential to make high profits or high losses in equal measure. Your risk appetite will depend on your age and financial responsibilities.
- Understand the relation between risk and return
Risk and return are directly proportional to each other. Higher the risk involved, higher is the return and vice versa. For example, ELSS promises higher returns compared to PPF and Fixed Deposits, but it also comes with a relatively higher risk.
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- Create a contingency fund
Before you invest anywhere else, you must create a contingency fund for those rainy days. Or else a challenging event or period in your life could strain your finances and coax you to end an investment plan abruptly. A contingency fund worth six months of your current income is good enough to keep you from dipping into your investment funds.
- Investments and insurance serve different purposes
An insurance policy is not a mechanism to build wealth but a tool for financial security during emergencies such as hospitalisation or death of the primary income generator. An investment instrument on the other hand yields returns and builds wealth by beating inflation. It helps you accumulate a corpus for fulfilling goals such as buying a house, funding children’s education, etc. Therefore, for best results, keep insurance and investments separate.
- Set some financial goals
Before you create a financial portfolio, you should have your financial goals in place. These goals will help you pick the right instruments to achieve them. For instance, you would need to invest in long-term investment instruments to create a fund for life after retirement, to buy a house, etc. and you would need to make short-term or medium-term investments to purchase a vehicle or go on a trip. When you know your goals, you then work towards picking the best investment instruments needed for those goals. For example, PPF is a great instrument to build a retirement corpus or to fund an event in the future (such as the purchase of property or the marriage of a child).
You might have your preferences, but when it comes to creating a portfolio, you have to allocate your resources among various types of assets in order to strike a balance between risk and returns. Diversification is important to hedge you against the volatility you might be exposed to through high-yielding instruments.
- Be disciplined
Investment is not a one-time affair and it calls for regularity in investment to ensure good returns. In order to inculcate a habit of forced investment, you can pick instruments where a monthly investment is required. Think Mutual Fund SIPs, PPF contributions, etc.
- Review your portfolio
Your portfolio needs reviewing from time to time, as the returns associated with most investment products fluctuate depending on market movements. Your financial goals could also change with time, requiring re-allocation of funds.
- Have a budget in place
One way to ensure disciplined investment is by having a budget laid out. If you allocate funds in places right at the beginning of the month, you know how much you have and how much you need to invest. Over-spending can be avoided and more funds can be saved for investment.
Money matters, taxation, investment – these matters can confound beginners. But take some baby steps into this world, set yourself some financial goals, start saving money. And before you know, you’ll be on your way to your first million.
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