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.
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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 ₹ 10 Lakhs 5 years back in stocks. During stock market crash, his portfolio has reduced to ₹ 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 ₹ 30 to ₹ 100 per transaction. If you are investing in 10 different schemes every month, you are spending anywhere between ₹ 300 to ₹ 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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Suresh
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sir..my age is 41and im a woman investing for 1st time and i want to start sip s….what would you advice me…i can spare around 20000 per month.
Hi Suresh,
Need your guidance on the following portfolio I plan to implement in FY15. The time horizon for investments I have is 1-3 years and 10 years wherein I would like to review my earnings after 1 year and re-plan as needed. I am in 30% tax bracket.
1. Convert 10 Lac FD into Debt fund – expected drop in FD rates and FD interest taxes makes them less attractive compared to Debt funds. Which Debt fund should I go for? I don’t intend to withdraw money from this in next 10 years and would like this to grow. Today I withdraw FD monthly interest and invest in MF SIP. Should I do the same and take out monthly out of Debt interest?
2. Invest 6 Lacs lumpsum in the following areas:-
Large and Mid Cap Funds – 40%
L&T Equity Fund – 10%
Franklin India Bluechip Fund – 10%
Franklin India Prima Plus Fund – 10%
Kotak Select Focus – 10%
Multicap Funds – 30%
Franklin India High Growth Companies Fund – 30%
Mid and Small Cap Funds – 15%
SBI Small and Mid Cap Fund – 15%
Sector Funds – 15%
Reliance Banking – 10%
UTI Transport – 5%
Please suggest your views and advice accordingly. Thanks!
Suresh KP
I am new to this but want to invest so that i will get some returns plus get a chance to learn in this field
hope you guide me where to invest and how
Gurinder, Since you are new to investment, you can look for mutual funds to invest. Spend 1 hour on my blog for next 15 days. Go thru the mutual fund section first and comments section for each and every article. You would know what kind of mutual funds can be invested by various risk appetite investors. In the process, you can open mutual fund account with ICICI Direct.com or Fundsindia.com. In next 4 weeks, you should be able to comment on this blog the funds which you want to invest based on your risk appetite. I can review and and confirm
Hi Sir,
I would like to know the best option to invest in the year 2015. I am 28 ,unmarried and earn 58000 per mlonth after tax and EPF. i am a regular reader of ur blog. Currently, I am investing on PPF-50000 Per year. ICIC Flexi Growth 4 ULIP 20000(6Yrs paid), LIC 2000 yr (5 yrs paid). The reason for spending less in all these was that I took a plot in Hyderabad and had to pay EMI of rs 15000 every month which is going to get over in 2 months.Recurring 5000 for 6 months as a contigency plan. I am looking for good pension policy which will give me atleast 50000 to 60000 lakhs after 25years. Please suggest me.
Sir i want to invest 2l which fetch me around 15% or more. I am medium risk taker. and age 38
Nice article Suresh. Thanks a lot for sharing. I just reconfirmed my investment with your article and I am good to go:-)
One thing I learned from this article that since banks are paying same interest as PPF, it is better to invest in PPF or moved funds from FD to PPF to save taxes. Nice point.
Thanks again Suresh.
Hi Suresh,
What are the ways, we can track or know the following (E.G) DSP Black Rock and Sundraram MF are investing in some respective stock. Is there any website to get this information. I am expecting your valuable guidance from you…
With Cheers,
Sathish
Sathish, You can go to moneycontrol and click on mutual fund section and select the fund. If you can click on the details, you would know which stocks such fund has invested
Hi Suresh, Thanks for ur reply. Sorry to disturb you again. Reference of my above question. My exact question is, by the current date or month wise filter, to get the list of leading mutual fund investors are investing in some unique stocks like.
My ultimate aim is, if mutual fund investing in some stock. By tracking them, we can also get benefit by investing in that same stock to get profit. Because, fund managers are so clever to find out the stock before its yield. Expecting ur reply… (E.G) In 8K miles stock – These both mutual funds DSP Black Rock and Sundraram are invested 6 month before itself, before its growth…
With Cheers,
Sathish
Sathish, Here is the link where you can see that the top-10 or other stocks where mutual fund schemes are investing. http://www.moneycontrol.com/mf/scrips_held/index.php
Hi Suresh,
I want to start my investing in mutual fund. My age is 25 . I can save upto 18k per month. Could you please suggest me on how to invest in Mutual fund SIP. I want to achieve my marriage , home and retirement goals as well,
Thanks
Sunny Singh
Thank You for the detailed writeup Suresh
Is MIP a good option to invest into taking into account reasonably safety of wealth and better wealth creation compared to FD/NCD ?
Could you suggest some good MIP to invest in the form of SIP for a period of 4-5 years ?
Joseph, MIP – Monthly income plan has specific objectives. They have an objective to provide regular returns to investors in the form of dividends. Why do you want to invest when you are looking as alterntiave to FD or NCD ?
Sir i want to invest 1000 rs. Per month in sip mutual fund for 10 years. Plz suggest me which is best fund for me? And how much money i get after 10 years?
Akshat, Invest in ICICI focussed blue chip fund
I am investing through SIP in M F through broker. Can I direct on line buy MF lump sump and SIP. What to do for that.
suresh shah
Suresh, Yes you can buy lump sum and SIP’s online directly. you need to do KYC on your own before you start buying them