DELHI: To optimize an investor's returns from a portfolio and minimize the risks in it, there should be a correct mix of investment options. And such options could include mutual funds (both debt and equity), fixed deposits (FDs), insurance, gold and real estate.
Although each of these investment products may not be suitable for every individual, they are the popular ones as they constitute most investor portfolios. Financial planners and advisers say that while trying to reach the perfect mix of investment products in a portfolio, the basic parameters like efficiency, diversification, risks, returns and costs should be kept in mind.
Also, there are several other factors that could influence the composition of a portfolio. "There is a lot of dynamism in the market and factors keep changing all the time. What might be good today may not be so after a year," says Ramalingam K, director & chief financial planner, Holistic Investment Planners. "Due cognizance needs to be taken of market volatility and the overall economic outlook which provides the outline for a good investment portfolio," he adds.
Before we delve into the composition of a portfolio, we should also look at the reasons for having a portfolio that is diversified into these five investment products.
According to Tarun Birani, founder & CEO, TBNG Capital Advisors, there are five important reasons that could prompt an investor to go for asset allocation. "It works as a rebalancing mechanism in the portfolio. It also helps in reducing the overall volatility of the portfolio," says Birani. "In addition, asset allocation brings in diversification to the portfolio, brings in investor discipline and the reduction in overall volatility helps in achieving the overall financial goal for the family," he adds.
FDs for lower risk
According to Ramalingam, bank FDs are ideal for investors with a low risk appetite. They are best suited for periods of up to one year or less. While investing in FDs, you should remember that premature withdrawals can attract a penalty, so the investment horizon needs to be finalized beforehand. "When markets experience volatility, FDs are the best place to park funds. Though the returns post tax could only be around 7%, FDs would safeguard against erosion of capital," he said.
You can set aside a percentage of your corpus for investments in FDs, and that percentage will depend on the market conditions, your propensity to take risks and the overall investment plan.
MFs provide stability, growth
Mutual funds can provide both stability and growth, and they provide small investors with an opportunity to make investments in an array of stocks and debt under one fund umbrella, and they are handled by a professional fund manager who invests in the market based on a number of parameters. "The major benefits of mutual fund investments are that they provide a safety blanket to investors' funds, diversification is offered and the funds are handled by the fund manager in a transparent manner," says Ramalingam.
For mutual funds too, the percentage of corpus to be invested will depend on priorities, the stage of life in which the investor is and, of course, the risk propensity, he points out.
Insurance is a must
Insurance offers you a perfect risk management plan and financial planners suggest one should take the online ter m insurance option against financial loss from the sudden demise of the breadwinner. Health insurance policies take care of the unexpected hospitalization expenses, while property insurance covers you from the risk of any natural perils destroying your property.
Gold acts as a hedge
According to Gurleen Kaur, a Delhi-based financial consultant, gold as an asset class is a protection against economic downturn. "Gold is a good diversification tool and it also acts as a tool against inflation. Moreover, gold holds an emotional value more than its financial value and is found in almost everyone's portfolio," says Kaur.
According to her, real estate is another important part of the portfolio. "Generally, it is seen that in India, real estate holds a significant component of one's investments and, according to trends, the real estate is generally transferred from generation to generation," says Kaur.
In our next edition, we will try to decipher the takeaways for investors from the Vote on Account presented in the Parliament on Monday.