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Building a good investment portfolio is every investor’s goal. But what qualifies as a good investment portfolio anyway? After all, what works for you may not work best for another investor. So, how do you go about building a solid investment portfolio that will help you attain your short-term and long-term goals as planned? Well, a balanced portfolio may be the right place to begin at.
What is a balanced portfolio?
Contrary to popular belief, a balanced portfolio does not always contain equal proportions of different kinds of assets. The asset allocation ratio may vary slightly between the different asset classes chosen. The defining characteristic of a balanced portfolio is that the risk and returns associated with the assets in the portfolio are fairly balanced.
In other words, the portfolio is neither too conservative nor too aggressive in its risk-return ratio. The asset allocation between high-risk assets like equity and more stable assets like bonds and fixed income instruments will depend on the individual's portfolio.
What are the essential components of a balanced portfolio?
While the finer details of a balanced portfolio depend on your personal risk profile and your own analysis of the markets, there are some essential components that this kind of a portfolio needs. In particular, you will have to include different categories of assets to reduce the overall portfolio risks and aim to optimise the returns you will earn from your investments.
Let’s take a closer look at the essential components of a balanced portfolio.
1. Equity
Equity investment involves putting your savings in equity oriented investments such as stocks or mutual funds. Equities are a popular asset class amongst investors on account of their high return potential. Further, the returns from equity products cannot be known beforehand, and the profits depend entirely on how the market moves. In other words there is no guarantee of return.
That said, equity assets have generally delivered some of the highest inflation-beating returns over the long term. However with high return also comes high risk potential. Hence it is suggested to remain invested in equity as an asset class for a period of min 3-5 years and beyond.
2.Debt
Debt is an asset category that carries relatively lower risk than equity. On the flip side, debt instruments also tend to give lower returns than equity does when the equity markets perform well. However, investing in debt helps balance the overall risk associated with your portfolio. This is because you can typically assess the returns from your debt investments beforehand.
Some common examples of debt investments include fixed income instruments like fixed deposits, debt mutual funds, small-savings schemes amongst others. Bank fixed deposits offer interest at a predetermined rate, and carry little to no risk. Debt mutual funds offer a range of funds depending on your risk profile and investment horizon. Small savings schemes are backed by the government hence offer stability of returns.
3.Cash and cash equivalents
Lastly, a balanced portfolio must also have a segment of assets that are easy to liquidate. Here is where cash and cash equivalents products come into the picture. These are assets that have short-term maturities and are easy to convert into cash. This asset class is suitable for maintaining an emergency or contingency fund on account of their liquidity profile.
Some investment options in this asset category include savings accounts, liquid mutual funds amongst others. Most of these assets have fairly short investment tenures and offer stable returns, making them suitable for you if you want to lower your portfolio risk and also have some liquid investments among your assets.
Things to keep in mind if you want or have a balanced portfolio
Like all kinds of investment portfolios, a balanced portfolio also requires a fair degree of care and mindfulness over time. Here are some important things to keep in mind for a balanced portfolio.
Conclusion
If you are keen on building a balanced portfolio, keep the above details in mind. You can then determine the ideal asset allocation among these essential components, based on your financial goals and requirements.
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