Secrets of building a profitable portfolio

I am 42 years old and want to invest the corpus received as a final settlement from my employer. Which are the best mutual funds to invest? R Venu, Surat

A good rule of thumb is to subtract your age from the number 100, to arrive at the ideal allocation for your investments. In other words, 100 minus investors' age determines the portfolio's percentage of equity investment. In your case, 58 per cent of your corpus should be invested in equity stocks are mutual funds. Forty-two per cent of your portfolio must consist of debt instruments. The 100 minus age rule not only states the risk-taking capacity of an investor but also encourages investors in diversifying the portfolio to minimize the risk. Risk tolerance and risk capacity are directly proportional to income and net worth. You must ask yourself how regular and secure is your current and future income from various sources like salary, profits, interest, rental, and return on other asset classes? Your answer will be the key to determining the amount of risk taken in investing equities.

The higher your income and corpus, the more risk-taking chance you can afford. Avoid allocating the lion's share to equities if your income is uncertain. Suppose your income is promising and reliable, which means you can bear the risk of a heavy allocation to equity. Many studies prove that Gen X or older adults may be more risk-averse than Millennials and Gen Z in the case of potential losses. This means the risk-averse investors prefer preserving capital and safeguarding their hard-earned money to the high return generating asset class or investment vehicle. Usually, the return on low-risk investment instruments either matches or moderately exceeds the inflation rate over time. If you are a risk-averse investor, stick to lower returns with known risks rather than higher returns with unknown dangers. You must know your appetite for risk-taking. If capital preservation is your motive, then adopt a conservative investment strategy where the primary goal is to preserve your capital and prevent losses in your portfolio.

I have been a spendthrift over many years, and Covid-19 opened my eyes. I am determined to save money and invest. Please suggest how I should begin? Vedula Jagadish, Jamshedpur

Indeed, the pandemic has taught all of us a thing or two about money management, the importance of savings and the significance of emergency funds, to name a few. Being extravagant and reckless towards savings often led to a debt trap. You would have lost many opportunities as a consequence of overspending and being profligate. It is better for you to start saving late than never. The earlier you begin, the quicker you unlock the returns of compounding. Save aggressively to catch up on the missed bus and time. Firstly, tighten the purse strings and switch to tightwad mode. Make a budget and rigorously follow the allocation. Developing a habit of saving regularly will reap dividends. However, merely saving money is not enough. It would be best if you chalked out your short-term and long-term goals. Children's education, marriage, retirement, health care expenses during old age are considered long-term goals. Save a certain percent of your monthly income to invest in various assets classes in order to accomplish your financial goals. Keeping a lump sum amount in a savings bank account or pile of cash at home is not considered as saving. You will lose the opportunity to beat inflation.

Moreover, cash and bank balance do not benefit from the power of compounding. Adopting goal-based investments is highly recommended. Having a monthly budget and drafting financial goals gives a glimpse of your financial status and helps you fulfil your objectives. Expenses tend to increase even with no growth in income. It would help if you cut unnecessary costs and spending to increase your savings every year. Ideally, increasing savings by a minimum of 10 percent is ideal for beating inflation. So, you can quickly realize your financial goals. Insuring one's life and family is vital.

A substantial amount must be invested for taking term insurance and medical insurance. Create a well-balanced, diversified portfolio, but doing only that will not beat inflation. You may park part of your savings in Equity Shares, IPOs, Mutual Funds, SIPs apart from other asset classes like real estate, Gold. Post Office Saving Schemes, Public Provident Fund, VPF, Recurring Deposit, Government Bonds, Debt Mutual Funds, Corporate Bonds are options for debt saving instruments. It is important to note that not all debt instruments guarantee capital protection.

(The author is a SEBI licensed Research Analyst. The alumnus of the Indian Institute of Foreign Trade (IIFT), he had held leadership roles at National Geographic, Reliance Radio Television Luxembourg, STAR TV, etc)