Yes, It seems we are entering in to a serious discussion. Building a portfolio is always depend on the capacity of one's income and risk taking. Let us take an example of Mr. A aged 25, working for last 5 years, having a current fund of 15 lakhs to invest and drawing an annual salary of 6 lakhs. Now, we know that a portfolio should be made mixing all investment goals. Let us do it.
Life Insurance. Let us imagine Mr. A is going to get married with in an year or two and after that he may have dependents. Let us give Mr. A an insurance cover of 30 Lakhs so if anything wrong happens his family will be able to live in the same standard for further 5 to 10 years after his death. An yearly premium of 15 to 25 thousand is more than enough here and Mr. A is met with the goal. No.1.
Saving Tax . Let us Give Mr. A an option of buying a home of around 30 lakhs with an housing loan of 25 lakhs which will be repaid in the coming 20 years. Here he will be paying around 2.5 lakhs per year as loan installment and entitled to save tax.
Accumulating wealth. You can notice here that while meeting the previous two goals we were in the process of accumulating wealth for Mr. A, Now Mr. A is with some commitments and only having a fund of 10 lakhs. He will be able to make additional investments of 1 lakh per year and not more than that. We have to build a portfolio for him to create wealth with a minimum risk. We know that share market is the best place where one can get maximum return. Real estate, Gold and Diversified Mutual Fund are the next best options for creating wealth. Here we have already invested in real estate by buying a home. Let us invest in share market now. Let us make Mr. A put 5 lakhs in share market, 2 Lakhs in Diversified Mutual Funds, 2 Lakhs in Gold 50 thousand in PPF and the rest 50000 in FD.
Now let us see an over all look to his portfolio.
Mr. A invested 33.3% of his over all fund to .......Reality........................Low risk
Mr. A invested 33.3% of his fund to ...............Share Market.................Moderate risk
Mr. A invested 13.35% in.............................Gold ETF......................Moderate risk
Mr. A invested 13.35% in.............................Mutual Fund..................Moderate risk
Mr. A invested 6 plus % in...........................Others ........................No risk.
If looking deep in to the above allocation you will find that the risk ratio is below 10% on short term, medium term or long term basis. More over this has a potential of growing more than 30% on an average on yearly basis if managed well.
Hope you are smart enough to build a portfolio of your own investment now. We will discuss about the skill of portfolio management in the next post.
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