How do you like your tea? Do you like having more water or more milk? What type of sweetener do you prefer? Should your tea be simple or spiced?
There are many more questions that make “your best” tea unique.
Similarly, creating the best portfolio for your goals can also be unique.
Do you, too, want to create the best portfolio that suits your financial goals?
Here are six tips that can help you build the best portfolio for your goals:
(1) Match your investments with your goals
For your goal-based investments to succeed, you can match your investments with your goals.
Are your goals short-term, medium-term, or long-term?
More importantly, are your goals SMART (Specific, Measurable, Achievable, Relevant, and Time-bound)?
If your goals are SMART, you can make a portfolio of mutual funds to match each of your goals.
Once you have listed and categorized your goals, you can select mutual funds that can match your goal’s horizon with the risk profile of mutual funds. You can also use mutual fund calculators to help you determine your SIP (Systematic Investment Plan).
(2) Keep risk appetite in mind
Your risk appetite or your willingness to take risks depends on aspects like your age, location, number of dependents, income level, etc.
As you move from one age group to another, your risk appetite declines. Therefore, you can plan your goals keeping your current risk appetite in mind.
For example, investing for your retirement corpus at 25 years of age can be based on more aggressive (equity-based) investments than doing the same at 45 years of age.
The simplest way to determine your asset allocation as per your age can be using the 100 minus age rule.
The 100 minus age rule indicates that the percentage of equity-based investments in your portfolio is 100 minus your age.
So, if your age is 25, the percentage of equity investments in your portfolio can be 100–25 = 75%.
(3) Emergency planning
A portfolio strategy can be incomplete if you don’t consider emergency planning.
Planning for uncertainties like inflation, job loss, medical emergency, theft, and more can help you stay on track with your goals. Therefore, emergency planning is one of the essential goals.
You can invest in liquid funds to build a robust emergency corpus. Liquid funds are debt-based funds that you can redeem at short notice. Certain months of your regular monthly income can be kept in these funds for emergencies.
(4) Diversification
Your portfolio can have a combination of equity, debt, commodities (such as gold), and more.
Where equity investments can help you beat inflation and reach your long-term goals, debt or fixed-income assets and commodities can give you downside protection and add stability to your portfolio. Moreover, you can also invest in passive funds (index funds and ETFs) to diversify your portfolio. These funds track the performance of their underlying index.
Not putting all eggs in the same basket can help you reach goals better.
(5) Monitoring and rebalancing
Periodic tracking and rebalancing of your portfolio can help you match changes in your income, goals, age-group based risk-appetite, and more.
(6) Avoiding biases
Following the above-mentioned tips can help you create the best portfolio only if done in an unbiased manner.
Common investment biases like the recency bias (giving importance to the most recent event), herd mentality (making investments similar to others), and more can lead to faulty investment decisions. You can seek paid professional financial advice from a certified professional to ensure that your portfolio decisions are free from biases.
Considering the six tips mentioned above can help you create the best portfolio for your goals.