How to Build an Investment Portfolio?

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  • Investment Basics
  • 4 min read
  • Jiraaf
  • Dec 10, 2022

There is a varied number of products that you, as an investor can invest in. But truth be told, you don’t need to invest in more than three-to-five broad asset classes to make a good portfolio.

But what are these asset classes, how do you choose investments within these categories, and in what proportion should you invest in each of these asset classes? Let’s explore the investment portfolio today.

Rules of Investing

The golden rule of investing is that there’s no golden rule.

That’s right. There is no one-size-fits-all approach when it comes to investing. Depending on your income, expenses, goals and risk appetite, you can create your own portfolio. In this blog, we’ll talk about generic principles that you can use to design your portfolio, and also take the case of Arnav to show a portfolio that could work well for him.

Our Case Study – Arnav Banerjee

Here are Arnav’s specifics:

  • 35-year-old software engineer, living in Bangalore
  • Earns Rs. 2.5 lakhs per month after tax
  • Stays with his wife (a social worker) and a 2-year-old daughter in a rented house, and plans to buy one although not anytime soon
  • His parents are self-sufficient, so he has no financial responsibilities apart from managing his own home and family
  • Arnav as a person is an aggressive risk-taker on investments

Now, we’ll see 3 different kinds of asset classes that anyone should invest in and talk about how much Arnav should invest in each asset class every month. Two of the other asset classes not covered below are liquid savings and real estate. We will assume that he has liquid savings equal to recommended 6 months of monthly income and has plans to grow the wealth so he could own & add real estate to his portfolio.

From his income, after deducting all his expenses, let us assume he has about Rs. 1 lakh every month to invest as a family across the three asset classes.

Asset class 1 – Equity

This consists of equity mutual funds and direct stocks. Investments made in equity should always be made with a long-term horizon of 10 years with a minimum 5-7 years possible holding period, since this asset class is volatile.

Depending on your age, your financial constraints, and your expenses, you can determine your risk appetite. And based on your risk appetite, you should decide how much equity you will want to keep in your portfolio. Higher the risk appetite, higher should be the portion allocated to equity.

In Arnav’s case, he earns well. And although he is an aggressive risk-taker psychologically, he is the primary breadwinner of the family, has financial responsibility and has a daughter whose education needs will start in a year. His risk profile, therefore, is moderate.

But because he has a moderate risk profile, he should invest between 50-60% of his overall portfolio in equity, split across mutual funds and direct stocks. Equity investment per month for Arnav: 60% of portfolio = Rs. 60,000

Asset class 2 – Debt

Debt products are those where you give a kind of a loan to someone, and they return that to you with interest. These include products like fixed deposits, bonds, debt mutual funds, etc. While these products are less risky and less volatile than equity, they also give relatively lower returns compared to equity over the long term.

If you have any major expenses, milestones, or goals in the next 2-5 years, it is advisable to put it in debt or alternate assets (discussed later), as they generally give a fixed interest, so you can be sure of the return you’ll get, as well as the duration.

With Arnav, since his daughter is due for her schooling very soon, he would need to plan for it so that he gets a fixed amount in a fixed duration. He can allocate about 20%-25% of his portfolio to debt, which can be in high-rated bonds. Debt investment per month for Arnav: 25% of portfolio = Rs. 25,000.

Asset class 3 – Alternative Fixed-Income Assets

This is an interesting class of products which are safer than equity, but slightly riskier than pure debt. Some alternate asset classes are:

  • Gold (physical, digital, SGB)
  • Asset leasing
  • Unlisted corporate and venture debt
  • Invoice discounting (financing a vendor’s invoice temporarily until they get paid)
  • Real estate (commercial real estate, REIT), P2P lending (lending to individuals at higher interest rates)

To get good returns from investments, alternate fixed income assets should ideally be about 15-20% of an investor’s portfolio. And in Arnav’s case, again, we can allocate 15% to alternate fixed income investment products like unlisted corporate bonds and invoice discounting that gives anywhere between 10-15% IRR. Alternate asset class investment per month for Arnav: 15% of portfolio = Rs. 15,000.

Arnav’s ideal portfolio

Here’s how we can design Arnav’s ideal portfolio for his yearly investments:

  • Equity mutual funds: Rs. 4,80,000
  • Direct stocks: Rs. 2,40,000
  • Corporate bonds: Rs. 1,80,000
  • Debt mutual funds: Rs. 1,20,000
  • Fixed-income alternative investments: Rs. 1,80,000

With the above allocation, Arnav can have a moderate risk portfolio that gives good returns. 60% of his portfolio is made up of long-term investments which he can use to purchase his home; the remaining 40% can go towards funding his short to medium term goals like his daughter’s education.

As an investor, you need to understand your short-term goals, long-term goals and your risk profile, and create your portfolio accordingly. At Jiraaf, we help investors generate great returns in fixed-income alternate assets. In case you wish to know more, feel free to sign up on the platform.

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