We all would have heard about investment portfolio but how many of us actually know what it is and how it works?  Yes, it needs a lot of hard work and technical calculations to create a good investment portfolio. Having the right mix of investment is essential and the mix should comprise of conservative, balanced, growth and aggressive growth investments. The success of the investment portfolio is measured by generated fixed income, if it has the capability to fund during emergency, if returns have the capacity to beat inflation and if the portfolio has satisfactory liquidity option. Having said all these, another major feature of a good investment is, it should be able to help in tax savings.

Sample Allocation of Risk

Aggressive Moderate Conservative
Annual Return 16% 14% 11%
Annual Standard Deviation 15% 10% 6%
  Portfolio Allocation
Debt 30% 50% 70%
Equity 60% 40% 20%
Commodity 10% 10% 10%
Total 100% 100% 100%


Asset Allocation

When it comes to investment portfolio, the way asset is allocated is very essential. The assets can be fixed or variable. How much to invest in fixed and variable assets depends on your risk bearing capacity and risk tolerance capacity. This capacity is measured by your income and wealth status. Asset allocation is an art and science. Based on market analysis and different industry analysis, asset allocation is done on investment portfolio.

How Asset Allocation Works?

It is essential to have a balanced portfolio and the growth should be at decent rates. If there is optimal diversification of funds, then the risk will be balanced with the return. The investments should have stability. And also it is essential to understand what the returns earning capacity is of each type of asset allocations. The returns on large capital fund is about 6%, income fund is 5%, small capital funds is 3% and liquid funds is about 8.76%. These are average rates across the past years.


Steps to Create best Annual Investment Portfolio

Every investor should firstly understand their risk appetite. Be sure about what should be the returns, taxation benefits and liquidity needs. The expectations should be realistic and various market conditions should be considered. Based on the investment goal have different types of asset allocations within the investment portfolio. It is good to keep yourself updated with market news, but ensure you are not getting smitten with the same. Irrespective of how best your investment portfolio is, regular revisiting and monitoring of the asset allocation is essential. In case if the investment is not earning returns as you expected, so if it total off your expectations, it will easy to correct the allocations at early stages instead of waiting until big loss. In order to ascertain if the investments are earning returns as per your expectations, create a deviation range. If the returns are within this deviation range then there is no need to create a revisit the allocation, just monitoring will be sufficient.

Tips for Smart Portfolio Investments

  • Manage your investment considering the tax benefits.
  • Any investment in equity should be less than for 5 years.
  • Take advice from fund managers if necessary but decisions should be made solely.
  • Consider retirement, children education and holiday’s while creating investment portfolio.
  • It is not your age that will determine your asset allocation; instead it should be your risk bearing appetite.
  • Investment should be wisely segregated between stocks, mutual funds, bonds, real estate or precious metals.
  • Understand the risk associated with each type of investment and accordingly invest. Spreading risk wisely is essential.
  • It is not necessary that you should have 6-10 types of diversifies portfolio; just 4 well balanced investments will be good enough for high return earning.

Go Beyond Just the Tax Planning this FY 17-18

Which Investment suits You best?

Based on your income, wealth status and risk tolerance it is advisable to decide which section you fall under- whether it is low risky, risky or high risky.  If you are a person who is ready to take high risk and earn high returns then best investment options are Options, Futures and Collectibles.

Let us see what investment options available based on the type of investor you are:

Options Risk Investments Low Risk Investments
•        Futures •        Real Estate •        Money Market, Bank Accounts
•        Collectibles •        Small or Large Capital Stock •        Government Bonds or Debts
  •        High Income Debts and Bonds •        Notes, Bills, CDs
  •        Equity Mutual Funds •        Cash or its equivalents

For all types of investment portfolio, it is essential to have a goal. At times the goal can be retirement; daughter’s wedding or so on. On the basis of these goals it will be easy to determine whether your investments should be long termed or short termed. If you are too young and is keen to create an investment portfolio for your retirement, then picking long term, high returns earning investments will be the best. Some of the examples for such long termed investments are corporate bonds, equity financing and capital notes.

On the other hand, if your goal is for daughter’s wedding which is about to happen in next 3-5 years, then think of short term investment portfolio. Include liquefiable and non- liquefiable investments into your portfolio to help in case of emergencies.

Annually, everyone should invest for insurance (health, life, home, car etc.), retirement, and emergency (liquid investments). Apart from these you should save for future plans like purchasing a home and investing in vehicle down-payments. All these should be planned in such a way that there is enough left for a normal lifestyle, without the need for going into any debt. Income of an individual should be utilized in the below patterns to ensure there is enough for the future. Though this is an ideal example, it depends on each individual how much they desire to save for future.

Investment Plan with Monthly Income

  • Monthly Expenses- 60%:
    This is the crucial part of every individual. Monthly fixed expenses cannot be ignored and with available income this expense has to be met. This could include rent, groceries, water bill, electricity bill, telephone bill, gas bill and food, entertainment, medical requirements and so on. Nearly 60% of the total income will have to be kept aside to meet the requirements of monthly expenses. It is essential to have 60% of the income towards this for a layman to meet the family requirements and to have essentials. Though 60% of the total income sounds to be really huge amount, most of them still find it difficult to manage monthly expenses with just this percentage of income. If you are able to tackle these expenses with just 60% then it will be easier to have something towards to savings and for future.
  • Emergency Fund- 10%:

                Though monthly expenses cover usual medical requirements, in case of emergencies there will be additional need of fund and it will not be easy to manage this fund for many of us. Thus having a separate reserve towards emergencies will come to help in case of any accidents, sudden health issues that are very expensive and not covered by insurance. Also it will be of great help in case of job loss or loss of someone in the family. This is more like a backup fund for the family in case of emergencies. When there are emergency funds, there will be less dependency on debts and liabilities.

Is Emergency Fund a Want or Necessity?

  • Down payments – 10%:

                Anytime you take up loans, make sure only 10% your income is getting blocked towards this. This includes your credit cards, vehicle loans, washing machine or refrigerator loan and so on. In case if you need to buy all these, take them one after the other. Thus there is always sufficient fund for other requirements in the family. Needs and wants have to be clearly differentiated and income should be spent more on needs and less on wants. There is a very thin difference between needs and wants. Understanding this will be very crucial and helpful through your life’s journey.

  • NPS – 5%:

                A contribution launched by Indian Government is National Pension Scheme and this offers a lot of options for people who are employed. Take time to understand more about NPS and invest your pension wealth wisely. Here are the benefits of investing in NPS in percentage.

NPS Fund Performance: Scheme – E (Tier- I)
Pension Fund Managers Year 1 Year 2 Year 3 Year 5
SBIPF 1.92 6.53 14 10.11
LICPF 0.91 6.16 NA NA
UTIRSL 3.67 8.06 15.76 10.07
ICICIPF 1.47 6.44 14.86 11.77
RELIANCE PF 0.53 5.86 14.06 9.3
KOTAK PF 1.42 6.4 14.44 9.79
HDFC PF 0.85 6.16 NA NA
Benchmark 0.29 5.43 13.63 NA


  • Mutual Funds – 5%:

                Mutual funds are now so common in India that there is no need for defining what it is. But how many of you are really aware of the risk and return of mutual funds. This is considered as  a risky investment and thus the proportion of income towards mutual fund is just 5%. The main reason for this type of investment is because it helps in tax savings.  Nearly 4% is invested towards Tax Saving mutual fund schemes and the rest 1% is actually invested in risky funds. The reason for this is, if the markets are too volatile, there is risk of losing the principal investment.

  • NSC- 5%:

The Government of India decides the interest rates on National Savings Certificate. The rate of interest on the National Savings Certificate varies from one period to the other. However, the principal on these investments is quite safe and there is lot of tax saving benefits. Here is the calculation of NSC:

Year NSC VII 01/12/2011 to 31-03-2012 ( Rate per Rs. 100) NSC VII 01/04/2012 to 31-03-2013 ( Rate per Rs. 100) NSC VII On or after 01/04/2013 ( Rate per Rs. 100) NSC IX Issue (10 Year) from 01/12/2011 ( Rate per Rs. 100) NSC VII On or after 01/04/2016 ( Rate per Rs. 100) NSC VII On or after 01/10/2016 ( Rate per Rs. 100)
0 year 8.4 8.6 8.5 8.7 8.1 8
1 year completed 8.58 8.78 8.68 8.89 8.26 8.16
2 year completed 9.31 9.56 9.43 9.68 8.95 8.83
3 year completed 10.11 10.4 10.25 10.54 9.69 9.55
4 year completed 10.98 11.31 11.14 11.48 10.49 10.33
5 year completed 11.92 12.3 12.11 12.5 11.35 11.17
6 year completed 13.61 12.08
7 year completed 14.82
8 year completed 16.13
9 year completed 17.57
10 year completed 19.13
Total Earning 50.9 52.35 51.62 134.35 48.74 60.12
  • Insurance -5%:

Though nearly 5% of your monthly income is invested towards various types of insurances, the actual benefit of this will be recognized when there is a need for money. The various types of insurance such as life insurance, health insurance, vehicle insurance, home insurance, travel insurance, commercial insurance have different benefits and the sum total kept aside for these can vary between 3% -5% based on what types of insurances you have. Some of the basic necessities are life insurance, health insurance and motor insurance, these are unavoidable and the 5% should be wisely invested into these insurances.

With the help of these create your own investment portfolio and monitor it from time to time. Unless you are very comfortable with the investment don’t finalize. Research and investigate various investment opportunities before you actually invest money.

If you are employed, it is easy to manage your investments as there is fixed income in the form of salaries. It will be easy and convenient to get into commitments such as loans and recurring payments. On the other hand, you are a businessman with high profit return then making investments of huge amount will not be concern. Monitor your business industry often to measure the sustaining power of the business. Managing money is a skill and if you are able to earn more money through managing it wisely, it can be considered that you are successful in your financial life.

The thumb rule for all type of investment is; investment should have the ability to safeguard the principal with a decent return earning capacity. If you are able to investment in such assets with your monthly income then your retirement dream will be a reality.