How to construct an ideal portfolio?

How to construct an ideal portfolio?

2 MIN READ

“In the midst of every crisis lies great opportunity”

– Albert Einstein

Equity markets worldwide have witnessed a sharp fall owing to the coronavirus outbreak which has led to a crisis-like situation. On the debt market front, yields have practically crashed due to anticipation of lower interest rates and deflationary pressure due to lockdown. Contrary to this, gold, which is often regarded as a safe haven is yielding healthy returns for its investors. So is it ok for investors to only hold only one asset class?

The answer is a definite NO, as each asset class has its own characteristics, advantages and disadvantages (We will discuss them in our forthcoming articles along with there relationship). Therefore, it is very important for any investor to create a portfolio holding a combination of these three asset classes.

So how to build a portfolio?

Before creating an investment portfolio an investor must analyse their style of investing. An investor can be classified as conservative, moderately conservative, balanced, moderately aggressive and aggressive investors. In order to determine your type, there are a number of questionnaires available on the web that can ascertain the fact, however, we believe the investor himself is the best judge on which category it belongs to.

Here are the few key parameters that can help you understand your type. Firstly, there are two parts of investment, one is “Risk” and the other one is “Return”. Every investor is inherently risk-averse but would be willing to take risk if compensated by higher returns. Therefore, an investor must analyse their risk profile by determining their “ability” and “willingness” to take risk. The ability can be determined by an individuals age, dependency, expense, goals, liquidity needs, investment horizon etc. The willingness to take risk can be understood by a combination of psychological traits and emotional responses. Based on your risk profile you would fall under any of the five types mentioned above.

So ask yourself and determine which category will you fall in? If you are still uncertain do send us an email/WhatsApp us, we will help you analyze. Don’t Worry! It’s completely FREE!

Once the investor has determined the risk category they can invest in the three asset classes namely Equity, Debt (Fixed Income) and Gold. The fourth asset class is real estate but due to lack of liquidity, it’s better to stick to the first three. Below is the ideal asset allocation for different type of investors.

 ConservativeModerately ConservativeBalancedModerately AggresiveAggressive Investor
Equity15%25%40%60%75%
Gold15%15%10%10%5%
Debt70%60%50%30%20%

Based on the type of investing, an investor can alter its portfolio allocation from time to time to suit their short term and long term needs.

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