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”
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