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As a child, most of us have a habit of keeping money
in a piggy bank or some equivalent container. As we grew up we understood
banking and similarly instead of keeping in a container we started savings in
banks in form of Fixed Deposits, Recurring deposits or savings accounts, which
gives a certain rate of return as well.
But what if instead of putting all money into savings
or fixed deposits we can diversify our hard-earned money to different channels
depending upon risk and return factor, duration, and keeping in mind other
factors as well.
What Is a
Portfolio?
A portfolio is a term used for a group of investments
done by a person to different financial instruments.
There is a famous saying - “Never put all your eggs
into one basket”. Dropping the basket will break all the eggs. Placing each egg
in a different basket is more diversified. There is more risk of losing one
egg, but less risk of losing all of them.
Here consider the group of baskets as Portfolio and
eggs in each basket is the money you put into different Financial Instruments.Thus you can create a Portfolio with the following
instruments:
1. Fixed Deposits, Savings, Recurring Deposits
2. Equity Instruments/Stocks
3. Bonds
4. Mutual Funds
5. Unit Linked Insurance Plan (ULIP)
6. Bullion
All the above instruments will give you the
diversified rate of return, the duration will vary, liquidity will differ. The
only motive to create a portfolio is diversification. Diversification is the
most important component in helping to reach the financial goal while
minimizing the risks.
What You
Will Achieve by Making Portfolio?
1. Security of Principal Investment: Any investment
should be done only if you are at least getting back your Principal. The term
we can use here is “Break-Even Point”. Having a diversified portfolio will
guarantee your security of the Principal.
2. Stability of Returns: You can earn consistent
returns if you have a good portfolio with stable financial instruments.
3. Liquidity: Unlike Fixed deposits, Equity
instruments are having more liquidity. A portfolio should be planned in such a
way that it can facilitate good opportunities upcoming in a market.
4. Tax Treatment: By minimizing tax burden yield can
be effectively improved. Different investments have different treatment in
income taxes. If you have investments in different instruments, you can make
more effective tax decisions.
What Are 3
Best Practices to Ensure Better Diversification?
1. Spread your portfolio among multiple Investment
Vehicles like stocks, Bonds, Mutual Funds, and even in Real estate.
2. Vary your Risks in the securities. You should not
be restricted to only the lowest risk or vice-versa. Ensure the portfolio
consists of varying risk levels.
3. Vary your securities by industry. Avoid making
industry-specific investments. It will minimize the impact of Industry-specific
risks.
The diversification although it is the most important
component, will not guarantee zero risks. No matter how much diversification
you do there is always a risk if you do any investment.
Creating a
Portfolio Is One Time Thing?
As the financial market is dynamic, you should not sit
back freely, after you create a portfolio. “Portfolio revision” should be done
which ensures monitoring your instrument in regular time intervals. Changes may
occur which leads to introduction of new instruments with high returns. This
may require investors to revise his/her portfolio by selling or adding
securities to the portfolio.
At What Age
You Should Invest or Create a Portfolio?
As they say, “There is no age for learning”. Same
thing applies to investment. But you should start as early as possible. Try to
invest some proportion of Income to SIPs of Mutual funds, recurring deposits.
This will ensure the allocation of income as well.
Always begin with a small
amount to ensure consistency as it will not highly affect your income if you
take up small initiatives. In my case, I have started to invest in Mutual
funds, equity Stocks at the age of 19, as it was my interest area.
Conclusion
Through managing our investments by diversification
not only ensure better return but simultaneously benefit capital growth in the
long term. According to portfolio theorists, any portfolio with 20 securities
reduces almost all kinds of possible risks (not to zero), if you buy a
different kind of stocks with different sizes and industries.
Always try to find opportunities in the financial
market. An ideal Portfolio is the one that gives the highest return with the
lowest risk.
Written By – Utkarsh Samiya
Edited by – Adrija Saha
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