Guidelines To Build Your Investment Portfolio Step By Step Guide
Summary
TLDRIn 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
- π Building investment portfolios should be tailored to individual life goals and the time available to achieve them.
- β³ The time horizon for your investment goals significantly influences the strategy and instruments chosen for portfolio building.
- π° For short-term investments (0-3 years), prioritize capital safety, liquidity, and minimize volatility to ensure funds are available when needed.
- π 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.
- π 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.
- π¦ Short-term financial goals like emergency funds or imminent expenses should be placed in highly liquid and secure instruments to ensure accessibility.
- π Volatility management is crucial for short-term goals; avoid assets that are subject to significant price fluctuations close to the need date.
- πΉ For medium-term goals, a balanced approach with a mix of equity and debt can help navigate market uncertainties while aiming to outpace inflation.
- π Long-term investments can afford to include a significant equity component due to the extended time frame, which can potentially yield higher returns.
- π‘ 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
πΌ 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.
π 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.
π¦ 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.
π 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.
π 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.
Mindmap
Keywords
π‘Investment Portfolios
π‘Life Goals
π‘Time Horizon
π‘Safety of Capital
π‘Liquidity
π‘Volatility
π‘Tax Efficiency
π‘Return Expectation
π‘Medium-Term Investment
π‘Long-Term Investment
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
[Music]
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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