Things to consider when creating a model portfolio – Forbes Advisor INDIA

The art of investing and making the right decision with the investment tools available has the power to transform an unstable financial future into a financially secure one. Creating a model portfolio is a great way to start this journey.

A model portfolio is a group of various assets that are combined into a portfolio. Many decisions are made to make this wallet. A model portfolio gives you the option to hedge your risks through diversification. It is also important to consider risk as a factor.

The idea behind this is not just looking at long-term financial goals. It should also be able to meet your current pressing needs and leave enough liquidity behind to help you manage your expenses. It is a balancing act between short and long term goals over a period of time.

Creating a good model financial portfolio is a process that involves both quantitative and qualitative factors. There are a multitude of factors that must be considered. It also involves a bit of soul-searching to discover the investments you’re comfortable with, as well as the risks you’re willing to take on your portfolio.

Here are simple steps you could start with while creating a model portfolio.

What should a model portfolio look like?

A model portfolio is a diverse mix of assets that includes large and small stocks, government bonds, debt, and other forms of assets. Typically, a model portfolio is created through a lot of research and analysis.

Ideally, the model portfolios are created by financial advisors who help you take care of the portfolio on a day-to-day basis, taking away a lot of work and effort from clients.

Basic requirements for building a model portfolio

Quantified financial goals

The foundation of a financial portfolio is your financial goals. Identifying what you’re saving for is the first task you should do when designing your portfolio. The most common financial goals include the following:

  • child education
  • creating a legacy
  • buying a house
  • buying a car
  • retirement planning
  • holidays

Listing your aspirations is the first step. Next, list the horizon next to each goal, that is, the time after or when you should do the same thing. Be realistic while doing this.

The next step is to quantify your goals, that is, estimate the funds needed for each goal. Don’t worry about inflation, for now, keep in mind what you think it would take to complete each one. The longer the horizon, the easier it is usually to save. This first step clarifies the amount of money you would need to make sure you meet your goals while still having enough to meet your daily needs.

Your disposable income

After listing your goals, the next step is to calculate your disposable income. This refers to the amount you have to invest, after taking care of your monthly expenses.

Disposable Income = Total Income – Total Expenses

This is a very crucial step. As you grow, your disposable income is likely to grow as well. So you can have more money to invest as you grow. It is important, to begin with, what you have now and what you can do now. When you have more to invest, you can refocus your portfolio accordingly.

Risk assessment

Every investment comes with a certain risk. Some investment decisions will involve more risk than others. Finding out your risk profile is a critical step in determining the best portfolio for you. Depending on your risk appetite, you will be able to filter the investments with which you feel comfortable.

This may seem like a difficult task because it is not an easy thing to solve. Here are some basic questions that can guide your thinking about this.

1. How would you behave or behave if the savings you have made increase and decrease?

2. Are you better off, mentally, with a small, consistent performance rather than a big performance?

3. Are you comfortable putting your money into something where you’re not sure the returns will be guaranteed?

Determining your risk appetite is important so you can choose the right investment avenues. A financial advisor may be a good option to consider here to help you through the process of understanding the risk profiles, both for you personally and also for the investment avenues you are considering.

It’s also important to spend time evaluating the risks associated with each of the asset classes you’re considering. Having a fair understanding of this allows you to understand which assets are suitable for your portfolio and which are not.

Finding the right balance

The next step, and perhaps the most important, is finding the right balance between the various asset classes and risk profiles you have chosen. You should ensure that you mix assets in a way that gives you the risk profile you are comfortable with. You can balance the portfolio with high and low risk assets. You can also opt for more secure options and thus create a more stable wallet.

The more research and time you put into this step, the better the results. Understanding each asset class closely, analyzing the performance of these assets in the past, projections for the future, the general stability of these assets, are all important criteria to consider.

Creating a model portfolio is all about following the steps above and finding that sweet spot, the portfolio that works for you. Also, to make sure your financial portfolio is aligned with your financial needs and investment strategy, here are a few things to keep in mind:

Things to keep in mind

Inflation eats your returns

When planning your financial goals, consider the effect of inflation on your savings. Inflation reduces the purchasing power of money and when planning for the long term, the corpus must take into account the necessary inflationary adjustment. Go with a fair assessment of inflation based on historical data and you can add enough of a cushion to make sure you’ve covered all your bases. It’s also safe to assume that the amount of money you’re investing will also increase over the years, and this plus returns should cover inflation, but it’s still wise to take inflation into account, even if you don’t. when you start

Asset allocation and diversification are the holy grails of your portfolio

We have been warned against having all our eggs in one basket our whole lives. The same goes for creating a portfolio as well. The very nature of today’s market is to be volatile. Diversification helps spread risks among different investment vehicles, so that if one doesn’t work out, hopefully the other will make up for it. Choose a variety of investments that don’t go up and down together.

Don’t overlook tax planning

When choosing investment avenues for your portfolio, your tax efficiency should be a key consideration. Different investment instruments have different tax implications, and if you’re smart about it, you can choose tax-efficient assets that not only maximize your wealth but also help save taxes. For example, Section 80C of the Income Tax Act of 1961 lists several investment vehicles that provide you with tax benefits on your investments. So plan your taxes when you invest to lower your tax liability and increase your disposable income.

Don’t forget to plan for emergencies.

Lastly, plan for rainy days. Emergencies can call out of the blue and you need to be financially prepared to deal with them. Creating an emergency fund is therefore essential. Put away at least six months’ worth of your income in a liquid fund that you can withdraw when needed. Invest in insurance plans to compensate you for the economic loss you could suffer in emergencies, especially in case of premature death and medical contingencies.

The bottom line

A model portfolio is a great tool if you are thinking of investing. But creating one is not without pitfalls and risks. Having a clear plan is the first step. Clearly articulate your goals, your aspirations, and what you’re trying to accomplish. This will give you a great amount of clarity and ensure that you don’t scroll around with your portfolio.

It is always a good idea to consult with advisors or use tools that help you create and manage the portfolio. At the end of the day, you’re investing your hard-earned wealth in this portfolio and you need to make sure it’s designed to do the job you expect it to do.

It’s also important to keep a close eye on what’s going on and take action if changes need to be made. It also helps to remember that goals are long-term and there may be short-term fluctuations. So you have to be measured and smart with your changes. A model portfolio does a lot of the work for you once you’ve created it. Doing it is the hard part. With care, thoughtful analysis, and a proper plan, you can achieve your financial goals.

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