The do’s and don’ts of a good investment portfolio

Start early: The fact that one should start investing is of unparalleled importance. Investment is a long-term strategy that often requires tweaks and changes to get right depending on the need of an investor. Investing helps you build a healthy spending-saving balance promoting a crucial habit of saving in your early years. Additionally, starting early also enables an investor to absorb more risk and have an opportunity at better returns.

Tip: Two asset classes that have provided the highest returns over the last 30 years in India are gold and real estate. Compare the price of a Kg of gold and a property in 1990 as compared to today – it’s absolutely staggering. However, these investments require a considerable chunk of initial investments – if you can’t invest in these asset classes, consider investing in REITs (Real Estate Investment Trust) or Gold Exchange-Traded Funds (ETFs)

Diversify your portfolio: Diversification refers to splitting your portfolio into various asset classes such as equity, debt, real estate, bullion, cryptocurrency and mutual funds. Each asset class has its own merits and demerits but it’s important to pivot your portfolio from relying on a single asset class to multiple asset classes generating an average return.

Invest in what you know: Investing in the right portfolio can be a life-changing decision – when you invest in the right securities over a period of time, your patience will be rewarded. Hence, it is important to invest in asset classes that you are familiar with. In 2021, people rode the cryptocurrency wave and faced massive losses when crypto’s volatility kicked in. Thus, invest in asset classes which you understand thoroughly.

Tax benefits: Tax planning is an important component when building an investment portfolio. An investor can receive several tax benefits on asset classes such mutual funds, life insurance, fixed deposits & PPF. A reduced tax liability with an investment in such asset classes ultimately results in a win-win for the investor.

Debt without collateral: When dealing with debt, either as a borrower or as an investor; lender – it is of utmost importance to have a collateral. As a borrower, if you default without a collateral, chances are your personal assets might be attached. Additionally, it’s safer to borrow as an entity instead of a personal account to avoid attaching personal assets.

Unsolicited tips: As an investor, do not rely on tips that you receive on WhatsApp or any website. Always invest in asset classes that you have sound knowledge of. Most of these tips are based on either short-term trading or are rumours intended to shift a stock’s price.

Invest blindly: Lastly, when adding an asset class to your portfolio, it is important to identify a few fundamental factors of a company. For example, when investing in a debt security – it is crucial to understand the credit rating of the instrument, i.e., chances that the company that an investor is lending to defaults on its interest or principal payments. Another example when investing based on fundamentals when it comes to equity is identifying the financial performance of the company over the past year and its future prospects.

Over-invest in illiquid assets: Let’s assume you’re in a situation where you need some money, and you identify investment in a property that you could potentially sell and use the money. However, selling a property is a cumbersome, time-consuming exercise. Therefore, liquidity is an important factor when you decide to invest. It is important to have a part of your portfolio invested in asset classes such as bullion, fixed deposits which can be easily liquidated in a day or two.

To provide you with some additional context, imagine how easy it is to sell a bar of gold in the market than to sell a piece of land. Therefore, liquidity in your investment is an absolute non-negotiable!