Guidelines To Build Your Investment Portfolio Step By Step Guide

Summary

In this episode of 'Your Life, Your Money,' Dr. Chandra Khan discusses the strategy for building investment portfolios based on life goals and time horizons. He emphasizes the importance of considering factors like time availability, liquidity, and volatility when selecting investment instruments. The video offers guidance for both DIY investors and those working with financial planners, highlighting the need for safety, tax efficiency, and return expectations in short-term, medium-term, and long-term investments.

Takeaways

• 😀 Building investment portfolios should be tailored to individual life goals and the time available to achieve them.
• ⏳ The time horizon for your investment goals significantly influences the strategy and instruments chosen for portfolio building.
• 💰 For short-term investments (0-3 years), prioritize capital safety, liquidity, and minimize volatility to ensure funds are available when needed.
• 🔒 Medium-term investments (3-10 years) allow for some volatility and can include a mix of assets to balance risk and return, considering the need to beat inflation.
• 🌐 Long-term investments (over 10 years) benefit from the power of compounding and time, making them more forgiving and focused on growth and tax efficiency.
• 🏦 Short-term financial goals like emergency funds or imminent expenses should be placed in highly liquid and secure instruments to ensure accessibility.
• 📉 Volatility management is crucial for short-term goals; avoid assets that are subject to significant price fluctuations close to the need date.
• 💹 For medium-term goals, a balanced approach with a mix of equity and debt can help navigate market uncertainties while aiming to outpace inflation.
• 📈 Long-term investments can afford to include a significant equity component due to the extended time frame, which can potentially yield higher returns.
• 💡 The importance of tax efficiency in investment decisions cannot be overstated, as tax savings contribute to the overall return on investment without additional risk.

Q & A

What are the key factors to consider when building an investment portfolio based on life goals?

The key factors include the time available to reach the life goal, the need for the money as a lump sum or cash flow, and the classification of investments based on tenure such as short-term (0-3 years), medium-term (3-10 years), and long-term (more than 10 years).

Why is the time frame important when planning an investment portfolio?

The time frame is crucial as it determines the approach to investment, the types of instruments chosen, and the level of risk that can be taken. Different time frames require different strategies, impacting the choice between short-term, medium-term, or long-term investments.

What are the primary concerns for short-term investment portfolios?

For short-term investments, the primary concerns are the safety of capital, liquidity, and minimal volatility. The investor should prioritize instruments that are safe, easily accessible, and stable in value.

How does the need for liquidity affect the choice of investments for short-term goals?

Liquidity is a critical factor for short-term goals because the money is needed within a short span of time. Investments should be in instruments that can be easily converted to cash without significant penalties or delays.

What is the role of volatility in short-term investment planning?

Volatility plays a significant role as it refers to the fluctuation in asset prices. For short-term investments, it is advisable to avoid volatile assets to ensure the capital is safe and the investment goal is met without unexpected losses.

Why is tax efficiency important in investment planning?

Tax efficiency is important because it can significantly impact the overall returns on investments. Choosing tax-efficient instruments can help maximize the net returns, especially in the long term where tax savings can accumulate.

How does the medium-term investment strategy differ from short-term and long-term strategies?

Medium-term investment strategies allow for a bit more volatility than short-term but require careful judgment due to the unpredictable nature of markets over this period. It's a balance between safety, liquidity, and growth, often involving a mix of asset classes.

What are the challenges in building a medium-term investment portfolio?

The challenges include the unpredictability of market movements, the need to balance volatility with the potential for growth, and the difficulty in timing the market to meet specific financial goals within the medium-term horizon.

Why is long-term investment considered easier compared to short-term and medium-term investments?

Long-term investments are considered easier because they have the benefit of time to ride out market fluctuations and recover from downturns. Over a longer period, the impact of volatility is reduced, and the potential for compounding returns is higher.

What are the common considerations across all investment tenures?

The common considerations across all investment tenures include the safety of capital, the investor's judgment in choosing the right instruments, clarity on investment timing, and the importance of tax efficiency to enhance returns.

Outlines

00:00

💼 Building Investment Portfolios Based on Life Goals

The speaker, Dr. Chandra Khan, introduces the topic of building investment portfolios tailored to individual life goals. He emphasizes the importance of considering the time available to achieve these goals and the type of financial instruments suitable for short-term, medium-term, and long-term investments. The video promises a step-by-step guide for both DIY investors and those working with financial planners, focusing on understanding whether financial advisors are providing sound advice. Dr. Khan discusses the critical factors to consider when building portfolios, such as the time horizon, the need for liquidity, and the required safety of capital.

05:02

📈 Short-Term Investment Strategies and Considerations

This section delves into the specifics of short-term investment planning, which is defined as having a time horizon of 0 to 3 years. The speaker highlights the need for capital safety, liquidity, and minimal volatility for short-term investments. He provides examples, such as needing funds for house repairs or a child's education, where the entire sum is required at once. The speaker also touches on the importance of tax efficiency and return expectations, noting that high returns are not always feasible with short-term investments due to the need for liquidity and safety.

10:03

🏦 Medium-Term Investment: Balancing Volatility and Growth

The paragraph discusses medium-term investments, suggesting a time frame of 3 to 10 years. It outlines the challenges of medium-term planning, such as market unpredictability and the need to balance volatility with the desire for growth. The speaker advises on the importance of safety, liquidity, and the potential for some equity investment to beat inflation. He also cautions against the use of products like ULIPs for medium-term goals, suggesting they are more suitable for long-term planning. The focus is on creating a balanced portfolio that can navigate the uncertainties of medium-term financial goals.

15:05

🌟 Long-Term Investment: The Power of Time and Tax Efficiency

In this part, the speaker addresses long-term investments, recommending a time frame of over 10 years. He explains that long-term investments are generally easier to manage due to the time factor, which can mitigate risks and allow for corrections in the market. The speaker emphasizes tax efficiency, selection of the right investment vehicles, and the importance of emotional control. He suggests that long-term investments, if managed correctly, can yield positive results, and he compares the benefits of modern ULIPs with mutual funds, highlighting the advantages of the former in terms of tax structure and investor behavior.

🔑 Conclusion: Key Principles for Effective Portfolio Management

The final paragraph wraps up the discussion by summarizing the key principles for building investment portfolios, regardless of the investment horizon. The speaker reiterates the importance of capital safety, sound judgment, clarity on investment timing, and tax efficiency. He encourages viewers to apply these principles to their investment strategies and invites feedback on the categorization of emergency funds. The speaker concludes by thanking the viewers and inviting them to subscribe and share the video for further insights.

Keywords

💡Investment Portfolios

An investment portfolio refers to a collection of financial assets such as stocks, bonds, cash equivalents, and other securities that are held by an investor. In the context of the video, building an investment portfolio is a strategic process that depends on an individual's life goals, the time available to reach those goals, and the level of risk they are willing to take. The script discusses how different time horizons for achieving life goals should influence the composition of one's investment portfolio.

💡Life Goals

Life goals are the objectives or targets that individuals aim to achieve over various periods in their lives, such as buying a house, funding a child's education, or saving for retirement. The video emphasizes that investment strategies should be tailored to align with these goals, as the time frame and the amount of money required will dictate the type of investments one should consider.

💡Time Horizon

The time horizon in investing refers to the length of time an investor plans to hold onto an investment before selling it. The script explains that the time horizon is a crucial factor in building an investment portfolio, as it influences the choice of investment instruments and the level of risk that can be managed. Short-term, medium-term, and long-term investments each have different planning considerations.

💡Safety of Capital

Safety of capital is the preservation of an investor's initial capital, ensuring that it is not lost due to market fluctuations or poor investment choices. The video script highlights that for short-term investments, the safety of capital is paramount because the investor cannot afford to lose money due to the proximity of their financial goal.

💡Liquidity

Liquidity in the context of investments refers to the ease with which an asset can be converted into cash without affecting its price. The video discusses how liquidity is an important consideration for short-term investments, as the investor may need to access their money at a specific point in time without delay.

💡Volatility

Volatility is a measure of the price fluctuations in the value of a financial asset. The script explains that for short-term investment goals, it is important to avoid volatile assets because they can lead to unpredictable outcomes, which may not align with the investor's need for a specific amount of money at a set time.

💡Tax Efficiency

Tax efficiency in investing refers to the strategy of reducing the tax burden on investment returns. The video script mentions that tax efficiency is an important consideration when building an investment portfolio, as it can significantly impact the overall returns, especially for longer-term investments where tax savings can compound over time.

💡Return Expectation

Return expectation is the anticipated return on an investment, which can be expressed as a percentage. The video explains that return expectations should be adjusted based on the investment's time horizon and the need for liquidity and safety. For short-term investments, the expectation for high returns should be tempered due to the need for lower volatility and higher liquidity.

💡Medium-Term Investment

A medium-term investment typically refers to an investment held for a period ranging from 3 to 10 years. The video script discusses that medium-term investments are trickier to plan due to the need to balance volatility, liquidity, and safety of capital, as the investor has a more extended time horizon but still requires the funds within a specific window.

💡Long-Term Investment

Long-term investments are those held for more than 10 years. The video script explains that long-term investments are generally easier to manage because they can withstand market fluctuations and benefit from the power of compounding. The key considerations for long-term investments include tax efficiency, selection of the right investment instruments, and maintaining a disciplined approach to avoid emotional decision-making.

Highlights

Importance of building investment portfolios based on life goals and time availability.

Different approaches for individuals with the same life goal but different time horizons.

Classification of investment tenures into short-term (0-3 years), medium-term (3-10 years), and long-term (over 10 years).

Short-term investments require capital safety, liquidity, and low volatility.

Medium-term investments allow for some volatility and can include locked-in investments for the initial years.

Long-term investments benefit from time, allowing for corrections and growth over an extended period.

Tax efficiency is crucial in investment planning, especially for long-term investments.

The role of safety, liquidity, and return expectations in short-term investment strategies.

How medium-term investments need to balance volatility, safety, and liquidity.

The significance of time as a key driver in long-term investment success.

Strategies for managing medium-term investments, including the use of hybrid mutual funds and debt funds.

The unpredictability of market cycles and the importance of a balanced approach in medium-term investments.

Why modern-day ULIPs can score over mutual funds in long-term investment scenarios.

The importance of not actively trading in and out of funds for long-term investment success.

How to handle the trade-off between safety, return, and liquidity in short-term investment planning.

The role of inflation in medium-term investment planning and the need to beat inflation.

Why emotional control is vital for long-term investment success and how ULIPs can help.

Transcripts

dear viewers welcome to yet another

episode of your life your money in this

episode I am going to talk to you about

how you can build your investment

portfolios depending on what kind of a

life goal you are trying to achieve how

much is the time available what are the

things that you have to keep in mind

when you build these investment

portfolios this is an important video

stay till the end of the video there are

many points which I'm going to discuss

through the video which are extremely

important you shouldn't be missing any

part of this video this is NRI money

clinic for you and I'm Dr Chandra Khan

but your financial guide for a happy

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living NRI money Clinic no hype just the

right

advice this video is for both to do it

yourself as well as people who are

working with the financial planners if

you are a doityourself investor this

gives you a guidance on how you can

build the port portfolio yourself if

you're working with a financial planner

the point that I'm going to discuss

tells you are your financial planners

working properly or not or they are just

beating around the bush do they know

their subjects very well or not you can

find out yourself once you listen to

this video listen to this video

carefully I'll take you through a

step-by-step process now let's look at

the process a little bit in detail a few

things are required for you before you

choose which instrument you are going to

choose to build your portfolio what are

the things that you need to know you

need to know how much is the time that

is available for you to reach your life

go if you're are 58 and you are building

a retirement Corpus you just have 2

years if you are 25 and you are doing

this to build your retirement Corpus you

literally have 35 years life goal could

be same for two different individuals

but the approach can be different if you

are trying to build a portfolio for your

daughter's marriage all the money that

you have accumulated you need it one

single point of time whereas if you're

accumulating a portfolio to fund your

retirement cash flows then you don't

need all the money in one day whereas

you require it as a stream of income

again the strategy that needs to be

adopted changes if you need the amount

as a lumsum or if you need the amount as

a stream of income so the things to

remember here is how much time do you

have and whether you need the money all

at once or whether you need the money as

a cash flow or over certain number of

years now let's classify your investment

based on the tenure you have there are

no Crystal Clear guidelines to DeMark

the Investments based on the term but

based on my experience and what I have

seen in life and what I have seen in the

lives of so many of our clients I would

say a tenure from 0 to 3 years can be

classified as shortterm a tenure between

3 to 10 years could be termed as

medium-term only when you have a tenure

which is more than 10 years it can be

properly classified as long-term why we

have to properly classif classify this

because the items that we choose in your

portfolio depends on the tenure that we

have again let me take you through a

little bit more of process in this let's

follow a step-by-step process first let

us look at a short-term investment when

you say short-term investment you have

to have a clarity about when do I need

this money most of the short-term

Investments do not follow a cash flow

then you need that money at one point of

time let me help you with an example if

you have to repair the the house the

moment you start repairing the house you

need that money at all at once if your

daughter is getting married in 2 years

from now you need all that money if your

son is going to a college and you have

kept that money to pay certain fees you

need all that money when it comes to

question of short-term investment you

have to presume that all the money is

required at once so there is no question

of cash flow planning which gets

involved here what are the things that

you have to look when you are doing a

short-term Planning number one is your

safety of capital you can't be put

putting money in doubtful assets

thinking that that institution or that

person or that scheme pays you at that

point of time you don't have time to

adjust also you don't have time to make

alternate arrangements so when it is a

question of short-term investment safety

of capital becomes Paramount the second

thing that you have to keep in mind is

the liquidity aspect of it now you need

this money within a short span of time

it could be 3 months 6 months 1 year 2

years 3 years so you cannot be parking

in an instrument which locks up your

money for longer periods of time if you

are locking your money for 5 years that

does not serve the purpose if you are

locking in funds like NPS they are

locked for long periods of time if

you're putting your money into a real

estate then again it can become illiquid

and you will not have the required

liquidity liquidity too becomes

extremely important in case of

short-term investment the third thing

that you have to keep in mind is

volatility volatility is asset prices

moving up and down so if you're doing a

portfolio to meet your short-term needs

the asset should not be volatile for

example you buy gold what happens after

1 month or 1 year you do not know gold

prices May climb up gold prices may fall

down commodity prices May climb up

commodity prices may fall down so a

volatile asset be it a mutual fund be it

a stock be it could be gold be it could

be Commodities cannot fit your

requirement as a short-term investment

if you're taking these instruments as a

short-term investment you are not

actually doing Investments are building

portfolio rather you are speculating a

speculation is you presume the outcome

will be like that but when you are

speculating the outcome need not be like

that since you have a life goal to chase

you have somebody to pay this money for

at the end of the period that you have

in mind you cannot expose your money to

the volatility what are the factors come

into picture one the tax efficiency how

much less tax can I pay is there a tax

efficiency I can derive by putting this

money suppose you invest for a period of

3 months there is nothing you can do no

financial plan or do it yourself can do

anything for you from a tax efficiency

point of view but if you say I need

money after 2 years they can look for

instrument which has a better tax

efficiency than a simple bank FD so tax

efficiency also has to be looked into at

this point of time the fifth point that

you have to keep in mind is my return

expectation everybody wants a high

return that's obvious but is it possible

to achieve the high return the answer is

no when you choose an instrument Which

is less volatile when you choose an

instrument which is liquid in nature

when you choose an instrument which is

very safe obviously the return gets

compromised so if you are looking to

build a portfolio for a short-term

purpose you have to accept the fact that

you cannot expect a very high rate of

return so if somebody goes to a

financial planner and say that I have a

requirement of money after 3 years you

invest in this uh mutual fund portfolio

anything can happen on the contrary the

financial plan of may tell you to put

this money in a bank fixing deposit or a

liquid fund of a mutual fund or some

debt instrument then that's the right

thing for him to do because he cannot

take the chance of volatility because

your life goal is very very nearby so

volatility should be zero are the

minimalistic liquidity should be 100%

safety should be uncompromising rate of

return you cannot obviously do anything

about it that's something you have to

compromise on now let us look at the

medium-term in investment a medium-term

investment is somewhere between 3 to 7

years normally you can say medium-term

but I would like to extend it up to

about 10 years because we have seen in

history periods which are as long as 10

years Market's not doing anything so it

is better to be safe and be prepared in

case if the markets do not do anything

for long periods of time you can see

many periods in history where markets

don't do anything for 5 seven years

period of time so you can't take chances

when you are planning your life goal

with a medium time Horizon in your mind

anything which is above 10 years you can

classify as longterm out of the planning

between short-term medium-term and the

long-term investment portfolios the most

trickiest part is building a portfolio

for medium-term investment it becomes

very tricky if you are a du to yourself

investor it becomes very tricky if you

are working even with the financial

planner why it becomes tricky because

you have to get the best Judgment at

that point of time you do not know

whether the stock markets are going to

go up you do not know the markets are

going to fall down if you say that my

medium-term goal is my son's education

or a daughter's education but I need

this money over a period of 5 years that

is the period when he goes to college

and where I have to make the fee or pay

the living expenses it becomes more

manageable but if you say I have to get

my daughter married on the 7th year it

becomes very very tricky to build a

portfolio it's not going to be easy so

you can't be pressing on the accelerator

if you press on the accelerator the

desired outcome may or may not happen if

you press on the brakes your money may

not grow and you may lose money because

it may not beat inflation so you have to

go through a middle path so when you are

designing your investment portfolios for

M the considerations are you can afford

a little bit of a volatility which is

better than the short-term Investment

Portfolio what we discussed earlier your

safety of capital is also equally

important when I say safety safety not

because of the volatility but safety

because of the schemes that you have

chosen the stocks that you have chosen

the bonds that you have chosen the

institution that you have chosen they

all should be safe you don't have much

of a Time medium term the time literally

flies so the safety becomes equally

important it's not very essential that

your money has to be that liquid like in

case of a short-term investment let's

say that your investment Horizon is 7 8

years and you are prepared to lock for

the first 5 years then that's perfectly

fine I'm not telling that you invest

your money in a ulip PL which locks your

money for 5 years and you can take no

ulips do not fit into the medium-term

investment category ulips will fit into

a long-term category they have a five

years time Horizon but you can't use

them but if there is an instrument where

it gets locked let's say somebody has

sold the property and to save on the

capital gains they want to lock it in 54

e wants you can consider that that's

perfectly fine where you get locked for

5 years and after that you have your

money for your requirements that's

perfectly possible so if you're planning

for medium-term requirement you can

afford to have locked in Investments for

first 3 to 5 years depending on when

exactly you need the money but it does

need not be as liquid as a short-term

investment likewise when you say my

investment Horizon is 5 7 years it's

obvious that there will be an erosion of

purchase price because of inflation

during this 5 seven years period of time

so you need to be having something which

will beat inflation which means you need

to be having a little bit of an equity

not 100% of it not 60 70% of it because

when you carry 60 70% of equity when a

medium-term goal is chased it may happen

or it may not happen if it happens you

are happy man I'm also an happy man but

what if even if it cannot keep up pace

with the inflation or the money just

doesn't grow Market remains static

that's a possibility so a good case in

this case for a medium-term investment

is a very good balanced portfolio a

portfolio of hybrid mutual fund a

portfolio of few aggressive funds a

little bit of a debt fund a little bit

of an FD whatever you think which can

keep your money safe you have to strike

a balance between the growth you must

reach that life goal that guides your

principle when you are attempting a

medium-term Investment Portfolio that's

exactly what you should focus upon dear

viewers I want to listen from you your

viewpoints on how do we have to

categorize the emergency funds that you

build should it be treated as a

short-term investment or should it be

treated as a medium-term investment

please give me your views in the comment

section below please substantiate

whatever the decision you take based on

rational points why you categorize it as

a short-term investment or why you

categorize it as medium-term investment

now let us look at the third element

which is the long-term investment when

it comes to question of long-term

investment as I said earlier it should

be 10 years plus anything less than 10

years plus you may categorize it as a

long-term investment but the amount of

time that is available is definitely

short anything can happen so I wouldn't

like to take the risk of telling that

investment Which is less than 10 years

is long-term in nature stock markets

need time the macroeconomics when they

change it takes a lot of time for them

to adjust themselves see the real estate

has an 8e cycle the stock market Cycles

are unpredictable geopolitics is

unpredictable what we can say for sure

is if you are an investor in the stock

market be it the mutual fund direct

stocks PMS ETFs ulips or any

constitution of the stock market what is

common amongst all this is they require

a long period of time to perform

themselves so it's easy to invest for

longterm it is easy to invest for

shortterm difficult to invest for the

medium term why it is easy to invest in

the long term because that time works in

your favor if you have a reasonable

judgment if you're working with decent

enough financial planners who have a

good understanding of this subject even

if they called it wrong if they get

their judgment a little bit of a wrong

because the time is available with you

the corrections will automatically

happen over a period of time any person

who loses in the long term has called it

wrong has no control over emotions if

you control your emotions if you don't

make the mistake of moving away from the

central line and getting into some kind

of a thematic funds which will not

recover at all an example is

infrastructure fund what people invested

somewhere in the Year 2005 6 7 those are

the ones which will lose money even in

the long term but if you remain on the

centrer line let's say you pick up a

large Cap Fund let's say you pick up a

hybrid fund which has 6040 or 40 60 kind

of a combination it's extremely unlikely

that you will lose money or your

investment purpose is not served by

long-term investment it's pretty easy to

make money in the long term so in the

long term what are the things that you

have to keep in mind your tax efficiency

so don't go in and out of the funds that

can create tax inefficiency if you

select right the right thing for you to

do would be sit quiet don't do anything

don't discuss it with your friends don't

look on the Google telling that okay

this fund is giving so much not giving

so much moving in and out of the fund is

not advisable for you but if you select

right and sit quiet it will definitely

work wonders for you the same case with

the stocks or a PMS or an ETF everywhere

the story is going to be the same thing

that is why I say in the long-term

investment Horizon the modern day ulips

score over mutual funds in many many

ways so they have got lower tax

structure they have got a protection

against failure in the form of an

insurance there the companies pay out

bonuses back into your particular plan

they compel you to invest so you will

override on the emotional turmoil you

will go through so they all work in your

favor so when you are investing for long

term time is the key driving tax

efficiency is the key selection is the

key so if if you adhere to these

principle long-term investment even if

you are a do it yourself can be achieved

quite easily without much of a

difficulty whether it's a case of

short-term investment medium-term

investment or long-term investment

couple of things remain common one

safety of your Capital number two your

judgment number three Clarity when you

should invest and when you should not

invest in certain instrument and of all

driving tax efficiency is extremely

important why because the tax that you

save is an effortless return that you

have made without much of an effort you

don't need to do anything if you save

taxes that itself adds return to your

portfolio dear viewers hope the video

that I've done today helped you to

understand at a broad level how the

portfolios have to be built how the

instruments have to be selected

depending on the tenure of your

investment if it did give you a

direction to follow in your investment

exercise please do give me a thumbs up

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