Today i am going to talk about portfolio. What is Ideal portfolio and what are the features, a good portfolio should have. First of all let me explain What is Portfolio ? Some of beginners might not know the term portfolio.
All the investments made by a person taken together is portfolio , it’s so simple. So , if i have invested Rs 20000 in shares, 50000 in real estate, 25000 in Mutual Funds and i am having Rs 1000 as a cash, that’s my portfolio.
We should also know about Asset Class . An Asset class is something where we can invest and that becomes our asset. If i buy a Home or plot or land , i build an asset in real estate category , if i buy anything in shares or mutual funds (equity) , i create assets in Equity asset class . These are just categories . Following are some asset classes:
Equity : Shares , Equity Mutual funds , Derivatives (Future and Options)
Debt : Fixed Deposits , PPF , NSC , FMP
Real Estate : Land , Flat , Commercial Plots , Home
Gold or Silver : Investment in these is also counted as Asset classes
Cash : That is also an asset.
So after knowing portfolio, let us know what are the features of an ideal portfolio. There are some good features of portfolio which makes it better than others . A good portfolio has some basic conditions which it must meet .
These important features are-
1. Investment Appreciation 2. Liquidity 3. Risk Management 4. Goal Oriented
When we invest in some asset class, our main aim is getting return. It should be such that increase should reflect in real life after considering the effect on inflation or tax.The best investment must be good enough to provide appreciation in real worth over long period of time .
Now a days the real return of Fixed Deposits is negligible when we factor out Inflation and tax. Real Estate and Equity (Long term) can generate good returns .
Another important parameter of a good portfolio is that it should provide enough liquidity , so that in case of need ,money can be taken out.
What is Liquidity ? Liquidity is how fast and easily asset can be disposed for getting cash . For example Mutual funds and Shares are highly Liquid , If we have them and want to sell, we can get the money soon . On the other hand Real estate is not a Liquid asset . So if urgent cash is needed , right price and or buyer may not be available in a short period.
Every portfolio must have some degree of Liquidity, as per the requirement of the investor.
Every portfolio or investment must be to some level insured or have element of risk management. What does it mean ? Generally investors concentrate very well on Profits and thinks how good an investment can be , High returns etc. But Worst case Scenarios and situations which may cause damage must be taken care of . Management of risk should be taken care of before making investment . Some of the steps to be taken are :
- Sufficient Insurance may be taken
- Performance of investment may be monitored properly . We should get out early in a bad investment and accept that a wrong decision was made.
Risk management is not buying some product for managing risk but being aware of things and taking right and logical decisions.
“An investment without a purpose is not a good investment”.
Each and every investment should be done after having of a strong reason . I have seen people who take Insurance policies to save tax at the last rush hour of the year . It is better to loose the tax benefit and rather than taking a policy . That kind of investment is just a waste .
When someone asks us the reason for making a investment , we should know why we did it ?
Some of the silly reasons for doing investments are :
I can save tax by that, My friend did it and recommended me, Everyone is doing it .. why shouldn’t I ?
Every time we take a decision, we must ask ourself some questions like :
- Do i really need it at this point of time ?
- Can i afford it ?
- Do i understand it well ? Can i manage my risk if people make me fool ?
- What is the purpose of this investment ?
If you get satisfactory answers go for it else take an expert advice.
To be continued next week