In a rush to make ends meet and pay the bills, people often forget to invest in the future. Most successful people today must have started from scratch at some point, and more often than not, this point is usually making a sound investment. Financial advisors and consultants usually recommend saving and investing small amounts of money in building a strong financial portfolio in order to reap the maximum benefits. If you haven’t given a thought about creating a financial portfolio for yourself and your family, this article will help you in understanding the basics of a financial portfolio and help you get started.
What is a financial portfolio and what does it consist of?
First things first, let’s understand what a financial portfolio is and what does it consist of. A financial portfolio is the display of your finances grouped as assets, investments, and liabilities. Financial assets like bonds, stocks, currencies, commodities, and cash equivalents, alongside non-tradable securities, like art, real estate, gold, private investments are included in a financial portfolio which includes, etc. To those wondering, “How much money is needed to start a financial portfolio,” it is important to know that there is no minimum amount that you can start investing. Most mutual funds and SIPs can be initiated starting from Rs. 500 per month. However, this amount will vary depending on whether you want to purchase stocks, metals, commodities or currencies.
A financial investment portfolio is essentially a breakdown of all your finances and consists of sections of varying sizes representing the asset classes and types of investments. There are a variety of securities which can be depicted in your financial portfolio, but the cash, bonds, and stocks are considered as the core building blocks of a financial portfolio. Thus, a balanced investment portfolio contains a diverse mix of assets and different types of investments.
How do I Build a Financial Portfolio?
The most important thing to remember is that building a healthy financial portfolio does not happen overnight. It takes consistency, fiscal discipline and dedication to cultivate an investment portfolio that gives good returns and can survive the uncertainties of today’s disruptive economic system. If you want to get started on the process of creating your financial portfolio, keep in mind the suggestions mentioned below:
- Create a Balance Sheet
Make a complete list of all the funds available to you and your current liabilities in as much detail as possible. This will not only help you identify your current net worth but also help you set suitable financial goals for the future.
- Focus on Loans and Debts
Once you know what you own and what you owe, the next step is to create a strategy for reducing the amount of loan and debt. Make a note of all the loans you owe, with their interest rates, and decipher how long it will take for you to pay them off. Start with smaller loan amounts and work your way through your debt by ensuring that you set aside a part of your monthly earning in reducing your outstanding loan amount. The goal is to ensure that you manage your loans, credit cards, and debt responsibly.
- Invest in long-term and short-term instruments
Identify suitable long-term and short-term investment tools and instruments that help you regularly set aside money for your future. Weigh the risk factor, the returns, the lock-in period and other benefits (like tax deductions) while choosing the right investment instrument for the portfolio. Make sure you invest in a variety of assets, like bongs, shares, commodities, real estate, precious metals, and enterprises. Develop an investment strategy and make sure you follow it with discipline.
- Invest in a Home
A home is one of the most critical investments and assets an individual can build. Thus, make sure that you are saving to build a home of your own if you don’t already have one. If you are investing in a project with land more than 500 sq. m., make sure that you register with a realtor before the launch. This way, the project would be covered by RERA (Regulation and Development Act). A few expenses which you would have to note while planning to invest in a home are mortgage insurance, utility bills, homeowner insurance, maintenance, home repairs, and property tax.
- Monitor continuously
Make sure that you keep a close watch on the valuation of all your assets. If you feel that an asset is not giving the returns it promised or is negatively impacting your portfolio, replace it with a more valuable asset whenever you deem fit.
How do you Manage a Financial Portfolio?
Be aware: Knowledge about debt and equities is must to ensure that you make the right investment decisions. Ideally, you must read up on how investment tools function to understand and invest wisely. Furthermore, you must also keep track of the latest developments in the economy. This will help you plan your investments better.
Nowadays, several reputed organizations offer capital management services, as well. They usually assign dedicated financial analysts and consultants to help inexperienced investors make sound decisions. If at any time you feel that the market is too complicated to understand, you must consult a financial advisor. Financial portfolio management requires a thorough understanding of the market, and a financial advisor would have sufficient expertise in this domain.
Be disciplined: In addition to having the right knowledge or support, it is crucial to invest in your financial portfolio regularly to ensure that it stays robust. If you earn a set amount every month, earmark a fixed amount to your investments as well. This will not only secure your long-term future but also create a safety net that can be used in times of unforeseen emergencies as well.
Similarly, make sure you monitor your portfolio regularly. This is essential to mitigate losses on bad investments and increase profits on good investments. Furthermore, keeping a watch on your portfolio keeps you motivates you to do better and take better decisions.
Be smart: It goes without saying that all investments must be made carefully and after exercising due caution. While investing, you must also keep in mind that some investments may be quite risky, like the share market. Always be aware of your risk appetite and invest wisely in high-risk instruments like the stock market. Avoid investing in assets by borrowing money to prevent falling in a debt trap. You must also be willing to invest and update your portfolio frequently to keep up with the changing macro-economic conditions.
Start early: It is always recommended that you start your investments as early as possible so that your financial portfolio gets built sooner. Also, in the early years of life, you can afford to invest more as you would have fewer financial commitments. This will not only help your portfolio become stronger and more diverse but will also build resilience to ensure that it can stand economic disruptions and shocks. Another benefit of starting your portfolio early is that you get more time to learn through experience and helps you gain more financial wisdom before investing in big-ticket purchases like home and commodities.
How do you Diversify and Analyse your Financial Portfolio?
You may have heard the famous saying, “Do not put all your eggs in one basket.” This is very much relevant and applicable to the process of building your financial portfolio. While it might seem natural to invest all your savings in one instrument (that is either low-risk or high-return), doing this can prove detrimental in the long run. Financial experts always advise diversifying your portfolio as much possible.
When you do this, it can effectively restrict the damage to the health of your financial portfolio in case the market takes an unexpected turn for the worse. When you intelligently spread your investments across debt, equity, gold, and cash, you can maintain the well-being of your financial portfolio with minimum losses. Thus, if you have a diversified portfolio, even if one of your assets diminishes in value, the others stabilise the impact. Here are a few tips which can help you when you plan on diversifying your financial portfolio:
- Do not put all of your money in a single industry, stock or investment company. Always try investing in a handful of trusted and reliable companies.
- The financial market carries a lot of volatility. By adding some fixed income solutions into the mix, you can tackle the uncertainty of the financial market.
- Do not go overboard with your investments. Never borrow money to invest in a high-risk instrument.
- Instead of investing a large sum of money, invest small amounts of money regularly to reduce the risk.
- Stay up to date with the changes in the financial market. Before investing in a company, make sure you look at its returns, filings and future prospects.
Although the strategy of diversification can minimize your risk, there is no denying that you will always carry a certain degree of risk while investing in external opportunities. While some decisions will require you to take on that risk, you can always follow a structured and disciplined investment strategy to safeguard your assets in the long run.
Generally, financial portfolios are handled and managed by financial experts, analyst and professionals today. However, if you want to take charge and empower yourself financially, you need to start by understanding the basics of how an investment works and learning about the different elements of a financial portfolio. If you are able to build a strong portfolio for yourself, you will be able to manage financial emergencies better, improve your net worth and have a comfortable retirement as well.
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