Investing in your surplus fund is the best way to make money work for you. Investments grow through interest or dividend income earned, depending on whether you choose debt or equity investments. But then, no one invests all their money in one investment. After all, why would you invest in a single type or category of investment and expose yourself to market risk?
Therefore, designing an investment portfolio and selecting investments carefully is of great importance.
Diversification is the allocation of investments across different assets and asset categories and industries. When we say "designing an investment portfolio," we of course mean diversification of the portfolio to reduce risk exposure.
You can invest in speculative assets and win big returns, but a market slump can erode your investments substantially. On the other hand, investing in safe instruments is good enough to keep you protected in such market slumps. But then, you will miss out on the market boom and even fail to beat inflation. So, how to strike a balance between return and risk?
You can diversify within an asset, like investing in stocks of different companies and different industries. And across instruments, like investing in government-backed and other debt instruments, the stock market, gold etc. Basically, it is about doing all you can do to avoid putting all the eggs in one basket.
Your portfolio can be a mix of physical assets and financial assets. A real estate investment to generate rental income or gold investments as a popular portfolio diversifier and inflation hedge are probable inclusions.
Debt Investments: A prudent investment strategy moves from the safe to the speculative. Safe investments provide a steady and assured return. Different fixed-income investments fulfil different investment goals. For a long-term debt investment, you can invest in Public Provident Fund (PPF) for instance. It has a lock-in period of 15 years along with tax benefits. For a shorter lock-in period, National Savings Certificate and Kisan Vikas Patra are more suitable. Investment in National Pension System (NPS) fulfils your retirement goals. Staying within the fixed-income category, insurance products offer a different angle. You get assured returns with the guarantee of a life cover.
Equity investments: Equity investments can be made through demat accounts and can be traded easily through stock exchanges. Equity-linked investment options like mutual funds and Unit-Linked Insurance Plans can also help you tap the market growth without actively trading in the market.
Commodities: Commodities are another investment option in which you can participate through commodity derivatives. Commodity exchanges allow investors to invest in agricultural products,precious metals, energy commodities, etc.
Retirement-centric insurance and other investments: If you are planning to add a retirement or pension plan component to your portfolio, you can go back to the asset classes and pick one or more of the long-term investments. For instance, in pension annuity insurance plans you pay the premium during the policy period. Once the period ends, your annuity payouts begin. Besides, people use investments like PPF and NPS for this purpose.
If you are willing to go for market-linked retirement investments, you can choose NPS and Unit-Linked Insurance Plans as per your risk appetite. In ULIPs, a portion of the premium paid covers the life cover, while the remainder is invested in equity-linked investments. Besides, there are endowment plans that offer long-term savings along with a life cover for the policyholder. These plans have maturity benefits,death benefits, and bonuses as applicable.
Once you are done designing your investment portfolio you must review it regularly. This is required to keep the portfolio updated as per the changing market scenario. For example, you will reshuffle your equity holding as the stock market experiences a sharp fall or a bull run. Similarly, if the interest rate on fixed-income investments falls, you may withdraw some of your investments and deploy them in more profitable asset classes. With these considerations in mind, you will design a balanced portfolio and update it timely to secure your financial future.