As an earning member of the family, you may have certain life goals that you would want to achieve. It could be buying a home in your favourite holiday destination, travelling around the world, sending your kids to a foreign university, building retirement funds, etc. To accomplish these goals, you would need significant funds.
And, although you may start saving money to realise these goals, keeping your money in the bank savings account alone may not be enough to build the corpus you need. This is why it is critical that you invest the funds in different instruments to let your money work and grow over time. So, when you start your investment journey, the next inevitable thing to do is build an investment portfolio. But this is easier said than done as it requires strategic planning and an understanding of the basic concepts of investing.
In this guide, we discuss a few tips on how to build an investment portfolio. But first, let's understand what an investment portfolio is.
What is an investment portfolio?
An investment portfolio is a strategy for allocating funds to different financial asset classes, such as stocks, bonds, equities, etc., mainly with the intent of achieving long-term financial objectives. The funds in different asset classes are invested in a way that is in alignment with the investor’s financial goals, risk-taking capacity and expected returns.
How to build an investment portfolio?
Building an investment portfolio, whether it is a stock portfolio or an investment portfolio with a bank, requires you to follow certain steps, which are listed below:
- Step 1 – Know your goals and determine your risk profile
Before you take your first step in the world of investment and start thinking about having a diversified portfolio, it is imperative that you define your goals and understand the risk appetite, i.e., the degree of risk you can afford to take.
Having a clear goal or a purpose for investment will help you make informed decisions concerning which investment options you want to choose. Similarly, knowing your risk appetite will help you choose how much you want to invest in different assets.
You must ask yourself whether you want to take an aggressive approach and invest in high-risk assets in anticipation of higher rewards or be more conservative and invest in only low-risk investment options that offer steady but assured returns.
For example, if you want to take a risk-free investment approach, you can invest in safe and secured investment options like an FD (fixed deposit) account offered by banks or start a SIP (systematic investment plan) and invest in mutual funds. South Indian Bank offers a wide range of mutual fund FD options and you can choose from these funds to suit your goals and risk appetite.
- Step 2 – Allocate the funds to different assets
So, now that you have taken your first step towards ‘how to start an investment portfolio’, by defining your goals, and determining your risk appetite, it is time to determine the optimal asset allocation in your portfolio.
Asset allocation refers to the distribution of your investment across different asset classes, such as bonds, FDs, mutual funds, stocks, real estate, etc. The goal is to strike the right balance between risk and returns that aligns with your investment objectives.
A well-diversified investment portfolio must include a mix of assets that perform differently under changing market conditions. For example, investing in equity mutual funds may offer you a higher return, but they also come with greater risk. Other assets, like debt funds and FDs, carry minimal risk, offering assured returns and stability to your portfolio.
So, based on your risk-taking capacity and financial goals, you must decide how much money you want to invest in different assets so that you can accomplish your goals without taking much risk.
- Step 3 – Diversify your investments
If you ask any investment expert for the best investment portfolio example, they may all unanimously say it is a portfolio that is well-diversified. Portfolio diversification is pivotal to reducing risk and maximising returns. By spreading your investments across different asset classes, geographical regions, and industries, you can manage the risk better and will not impact much from any fluctuations in a specific industry.
Diversification of an investment portfolio allows you to leverage the potential of different market segments while minimising the risk of a single investment.
- Step 4 – Keep track of your investments
Building an investment portfolio is not a one-time endeavour. To ensure that your investments remain aligned with your goals and risk-taking capacity, you must monitor and adjust the portfolio from time to time.
Review your portfolio at least once a year, assess the performance of the different assets, and make necessary adjustments accordingly. When reviewing your portfolio, consider your current financial situation, changing investment objectives, and market conditions.
You must assess whether your investments are performing as expected or if you need to reallocate your assets and rebalance your portfolio. By monitoring your investments and taking corrective measures proactively, you can easily adapt to changing financial circumstances and market conditions and stay on course to achieve your long-term goals.
Conclusion
A strong investment portfolio requires investing in a mix of assets according to your financial goals and risk-taking capacity. Just as it is important to invest in the right instruments and the right proportions, it is equally critical to periodically review and adjust your portfolio so that it remains aligned with your changing financial goals.
If you are just starting your investment journey, you can take advantage of the South Indian Bank’s wealth management services. These services allow you to connect with a financial expert and seek their guidance on various financial aspects, including tax planning, drafting, and building a strong investment portfolio.
Disclaimer: The article is for information purpose only. The views expressed in this article are personal and do not necessarily constitute the views of The South Indian Bank Ltd. or its employees. The South Indian Bank Ltd and/or the author shall not be responsible for any direct/indirect loss or liability incurred by the reader for taking any financial/non-financial decisions based on the contents and information’s in the blog article. Please consult your financial advisor or the respective field expert before making any decisions.