How to build a portfolio for your financial life?( part II of II)

Here's how you can build your financial portfolio.

The first step towards building a portfolio is to have a clear goal. Once you have that, then it's relatively easy to build the rest of the portfolio in a way that's suitable for meeting your goals.

Goals that need to be fulfilled in the short-term are fundamentally different from long-term goals. Short-term goals are best fulfilled using fixed-income products such as a bank or a post office deposit.

If you are saving gradually towards such a goal, then the post office or bank recurring deposit is a reasonable tool. It yields a return of 7.5 per cent per annum. However, this should only be used for savings targets that are no more than two to three years away. Any longer and the ill-effects of the low returns will start becoming more and more meaningful.

For fulfilling long-term financial goals, the best option is to use a portfolio comprising of equity mutual funds. As we have read, equity is the only type of asset that can ensure that your money grows faster than inflation and does not actually lose value in real terms. Fixed-income investing is safer, but generally cannot beat inflation.

However, equity mutual funds can be volatile and thus only suitable for long-term investments. Over the short-term, the ups and downs of the stock markets could very well lead to temporary losses. Because of this, it is not recommend to invest in equity mutual funds if your financial goal is nearer that about three to five years.

This point is beautifully illustrated in the accompanying graph. This graph traces the growth of an investment over ten years in three different types of investments. We have chosen three types of funds and calculated the average performance of all funds that are more than ten years old. What looks risky in the short-term can work very well in the long-term. What looks like volatility can actually bring great returns.

Two of these funds are equity oriented. Of them, one invests in large companies while the other invests in smaller companies. The third type is a very short-term fixed-income fund called liquid fund. These funds are heavily regulated to be closest to risk-free investments. For the purpose of understanding returns in this graph, they can be considered equivalent to bank and other deposits.

Each and every investment should be done because of a strong reason. I see people who take Insurance policies to save tax at the last rush hour

of the year !!!   Better loose the tax benefit and don’t take that policy. That kind of investment is nothing more than a waste or burden.

When someone asks you the reason for making a investment, you should know why you did it ?

“A good investment is one which has a purpose”

Ninad Kamat

CERTIFIED FINANCIAL PLANNER^CM

www.letsmakeaplan.in

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How to build a portfolio for your financial life?( part I of II)

To understand how to build a portfolio, we need to understand what the term means and what it implies. This is necessary to understand what role a portfolio plays. A portfolio is actually a type of briefcase. No, seriously, the original meaning of the word is simply a bag designed to carry documents in. It became associated with investments because in the early twentieth century, stockbrokers would keep each client's share certificates in a separate portfolio. From thereon, the word gradually came to mean any kind of collection of documents. In finance, it specifically means the investments held by an investor, generally all the investments that an investor has.

However, the word's meaning in personal finance has evolved a great deal. A portfolio is a lot more than a collection. For individuals, the best way to plan their investments is to have a separate portfolio for each financial goal.

Different mixes of funds, stocks and other assets lead to different risk levels and different gain expectations. Most people find it difficult to match these to what they want. If you're asked, "What is your risk level?" you'll probably give an answer of some sort but it will just be your gut feeling.

However, if you think of specific financial targets and think of the money needed for them, then you will be able to answer questions about risk and returns precisely. For example, you'll need money for your daughter's higher education after three years. You'd like to buy a house at least ten years before retirement. You'd like to go on a vacation to Europe after two years. You'd like `2 lakh to always be available for emergencies.

Each of these goals is very precise. The risk you can take with it, as well as the amount of money needed can be quantified quite precisely. Therefore, it is relatively easy to decide what kind investments should be made for each of them. Each individual must have many portfolios, one for each financial goal. The other important thing is that a portfolio is not simply a collection. It has different parts that fit together in specific roles and complement each other. 

With experience, you'll learn the basics of constructing a portfolio as well as learn about some model portfolios.Having a separate portfolio for each financial goal gives you the best chance of fulfilling them.

To be continued....

Ninad Kamat

CERTIFIED FINANCIAL PLANNER^CM

www.letsmakeaplan.in

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Sketch is sourced from Carl Richards of behaviourgap and is used with prior permission of the creator. They are subject to copyright.

Woww!!! SENSEX at 27k.... You still waiting on the sidelines??

I always wonder whether its the dynamic nature of Equity Markets or the high returns that has attracted me towards this asset class.  But when I dig a little deep I find that its actually both (frankly with a slight bias towards the nature). Having entered this personal finance profession(mid 2007) at the cusp of a recession, I can proudly say I am grateful enough to experience a complete cycle of equity market movement. Having said that, I also wonder about, how many investors benefited from this complete cycle. And the the only number that comes to my mind is, a very minuscule one - not more than 5% of Indian investors.

But why??

Is it the volatility of equity markets, the fear of loosing your hard earned money, or is it the Fear of Sensex Figure aka FSF (right now its 27000) that is keeping you away. While I have already covered the first two aspects of this question in my earlier blogs, I would like spend some time on (this stupid) FSF.

Timing the market

FSF is nothing but greed of timing the market. Back in September 2013, when everyone was bearish about the economy and the equity markets, did you ever think that the stock markets would zoom over the next nine months and that equity funds would deliver a 50 per cent-plus return? No, right. Nobody can say for sure when the next correction will come about, so that you can start your investments. Instead if you had simply started investing a small amount (via mutual funds) you would have generated returns in excess of 12%.

Converesely:

What this same FSF could also do to you is, as and when your financial goals are near it will deter you from withdrawing or shifting your Equity investments to a safer (debt) asset class if the markets are inching upwards, as greed would have overpowered your consciousnesses about financial goals and you will have made a strong attachment towards this high return instrument.

In fact, behavioral finance tells us that investors are emotionally wired to act at exactly the wrong times. Although the dynamic nature of Equity Markets makes it important for a investor to dedicate a lot of time towards research of individual stocks, thanks to Mutual funds this is not mandatory. We already have a good set of consistently performing mutual funds which you can choose and start your investments systematically without FSF.

For the first time I am sharing an example of my personal investments with you. I have purposely deleted the names of the funds as I feel that's the least important(for now). Its the time(no of days) that I would like to point out that my investments have spent in the market. In the first investment which is an SIP I made it a point to continue investing through the bad times as well as the good ones, whereas the second one was a gift by my father and I am still proudly holding it.

When I look at people still investing in boring traditional investments, I have mixed feelings of sadness & despair. Why do investors lack interest in Equities, rather what is so interesting about Fixed deposits/Real Estate/Gold that people flock to it. History is a great teacher, they say, and I hope it teaches us to make better decisions when it comes to our personal investments.

Ninad Kamat

CERTIFIED FINANCIAL PLANNER^CM

www.letsmakeaplan.in

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