How to Build Perfect Investment Portfolio to get superior returns?
Many of us struggle creating a perfect investment portfolio which is suitable to us. We invest in different investment options and some of us achieve our goals and some of us would miss the goals. How to design our investment portfolio to get superior returns? How to build a perfect investment portfolio which is suitable to us for creating wealth in long term?
What are the components of the perfect investment portfolio?
Before we jump on how to create the good investment portfolio, we need to understand the components of it. Major components are simple to understand, flexible to make changes, easy to operate, diversification, cost affect and less taxed. I would go into detail and explain with examples.
1) Simple to understand
Our investment portfolio should be very simple to understand. You should know what it is and how to invest, tenure etc. If you don’t understand mutual funds, then is no point in taking decision to invest mutual funds.
e.g. One of the reader Ms.Madhurima (name changed) commented on this blog that she is new to investments and want to invest in ULIP immediately. Her friend suggested her to invest in such option as she is a less risk taker. She is not aware of the charges that would be deducted from the amounts she is thinking to invest in ULIP.
Key message: Don’t invest if you do not understand where you are investing.
2) Should be flexible enough to make changes
Your portfolio should not be too complicated and you should be able to make changes quickly. It should be flexible enough to change any asset classes.
e.g. I got e-mail from Mr.Akhil (name changed) and he was investing in 78 stocks which includes some of the SME stocks. It is so complicated to track such large number of stocks. He would end up doing tracking every month to see which his performing good and to book profits. There is no flexibility in his portfolio to make quick changes (selling or buying).
Key Message: Invest in options where you should be able to quickly make changes if required.
3) Easy to operate
Prefect Investment Portfolio should be simple to operate. Many investors complicate the process and depend on friends and brokers to operate their investments.
e.g. Mrs.Sruti was depending on brokers recommendation on mutual fund investments. She just keeps money in the bank and her MF broker was operating her mutual fund account. She could not realize till the time her mutual fund investments were not performing well. The broker was buying mutual fund units of those mutual fund houses who were offering higher commissions to brokers to sell such low performing schemes.
Key Message: You should be able to operate your investments with less efforts. You should be able to easily create Mutual Funds Systematic Investment Plans (SIP)’s as an example. You should be able to buy or sell stocks with few simple steps and within a few minutes. During this process, you would gain knowledge about such schemes. You would not invest blindly.
4) Diversified Portfolio
Your portfolio should not be overweight or underweight. It should depict the risk tolerance level after considering tenure of investment.
Example No.1 – Mr.Rahul has messaged saying he is a high risk investor and invested Rs 10 Lakhs 5 years back in stocks. During stock market crash, his portfolio has reduced to Rs 4 Lakhs. He was enquiring whether his stocks would recover or not. It is very difficult to come out of such situation.
Example No.2 – Mr.Naresh want to invest for his daughter education and he wants to invest for 10 years and willing to take some risks. However he is investing in RD/debt funds. He can consider equity and balanced mutual funds as some of the investments to make it as perfect investment portfolio.
Key Message: Avoid investing too much in specific investment. Diversify your portfolio. Even if you are high risk investor, invest in various options like stocks, mid-cap/sector funds, high return NCD’s/Bonds etc. based on your risk appetite. Don’t invest in single investment option.
5) Cost effective
Are you investing your money with lesser costs? Are you paying high brokerage charges for stocks or high transaction charges for mutual funds? Investing with lower costs would help you to earn good returns in the long run.
Example No.1 Mr.Raju is investing in mutual funds regularly. Some of the brokerages are charging very high transaction charges ranging between Rs 30 to Rs 100 per transaction. If you are investing in 10 different schemes every month, you are spending anywhere between Rs 300 to Rs 1,000 as brokerage charges.
Key Message: Better way to create wealth from mutual funds is investing through SIP where transaction charges are less. Some of the mutual fund brokers like Fundsupermart and Fundsindia are offering zero transaction charges. Review such brokers and if found suitable, you can subscribe through them. Another way is directly investing in mutual funds where you can save Trial fees of 0.5% to 2% depending on the scheme. This is one area where even I need to improve.
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6) Reduce Taxes
Your portfolio is perfect investment portfolio if the returns are less taxed. No point in selecting high return investment option and end-up paying high taxes.
E.g. Mrs. Neelima has been investing for daughter's education for 15 years in recurring / Fixed Deposits every year. Returns are taxable based on tax slab where she need to pay 20% of such interest. Since she does not need money for 15 years, she would have chosen to invest in PPF and get tax exemption u/s 80C every year + tax free returns after 15 years. This way she would have made her portfolio as a perfect investment portfolio.
Key Message: Select investment plan which is best suitable based on your risk appetite and tenure and where you need to pay less tax or zero tax.
Readers, what do you feel about this perfect investment portfolio? Do you feel there are any other parameters which needs to be considered to build a strong investment portfolio?
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How to Build Perfect Investment Portfolio to get superior returns