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.

  • Choose an asset allocation depending on your profile. You can choose a 50/50 or a 60/40 asset allocation based on what works for you to start with.
  • Diversify your investments within the different asset classes.
  • Revisit your portfolio and check for any deviations from the asset allocation periodically.
  • Rebalance your portfolio on a regular basis

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.

Latest Comments

Leave a Comment

200 Characters


Read Next

the-real-cost-of-buying-a-car

The real cost of buying a car

There are a lot of hidden costs attached to buying your car. Get familiarized with it.

how-to-make-your-car-stand-out

ARTICLE

How to make your car stand out!

Here are some solid ways to get a makeover for the love of your life.

car-shopping-best-fit-for-your-needs

Car shopping - Best fit for your needs!

A few things to consider while deciding on your perfect mean machine.

Load More

Disclaimer: This Article is for information purposes only. The views expressed in this Article do not necessarily constitute the views of Kotak Mahindra Bank Ltd. (“Bank”) or its employees. The Bank makes no warranty of any kind with respect to the completeness or accuracy of the material and articles contained in this Article. The information contained in this Article is sourced from empaneled external experts for the benefit of the customers and it does not constitute legal advice from the Bank. The Bank, its directors, employees and the contributors shall not be responsible or liable for any damage or loss resulting from or arising due to reliance on or use of any information contained herein. Tax laws are subject to amendment from time to time. The above information is for general understanding and reference. This is not legal advice or tax advice, and users are advised to consult their tax advisors before making any decision or taking any action.