#WhatTheFinance – What is a Balanced Investment Portfolio?

A Balanced Investment Portfolio is a selection of investments that is capable of both providing growth as well as mitigating risks. I promise you that figuring out a balanced portfolio (so important) isn’t as boring as you think it might be. 

Let’s begin at the very beginning. Your investment portfolio comprises all the investments that you possess or that you have made in your name thus far. I’m not talking just about shares – it can be Fixed Deposits, it can be Bonds, it can be Gold, it can be real estate. Essentially, anything and everything that you’ve set aside for retirement, a specific goal like a house or car, or a rainy day. Now that we know what a portfolio is, let’s get into risk, which is crucial for understanding how to get a Balanced Investment Portfolio.’

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Taking Risks, Eating Rusks

Investing, at times, can seem like gambling sometimes, but it’s not. It’s part science, part art and most importantly, completely doable. It just requires an understanding of risk and our personal appetite for it. The thumb rule when it comes to risks and investments is this:

The riskier the investment, the higher the return.

This is evident when you invest directly in shares and the share market (Equity). Let’s say you invest Rs. 1,00,000/- and buy 1,000 shares at Rs.100/- each. If the share price goes up to Rs. 112/- you’ve made a profit of Rs. 12,000/- right there. If the share price dropped, however, your investment’s value will plummet along with it. Mutual Funds, even those that invest in Equity, are a less risky than investing directly in shares because the fund diversifies, that is, they split their investments across a number of companies so even if one falls, there are other shares to act as a safety net. It also helps that Mutual Funds are managed by experts who are constantly tracking the market and investing in the right shares. The least risky investments are government bonds and fixed deposits. There’s a guarantee that you won’t lose your money, but the reward is definitely less. Your money’s earning potential will also be limited in comparison to shares and mutual funds.

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The Importance Of A Balanced Portfolio

A balanced portfolio is an ideal mix of investments across all risk levels. But what is ideal? It depends entirely on you, your age and your financial goals. Younger people can afford to take on more risks and invest aggressively. Equities have a greater earning capacity and real growth in equity investments happens only over the long term. The older you get, however, your tolerance for risk comes down and you should look to park more funds in investments that can be easily converted into ready cash, like Fixed Deposits or Recurring Deposits. A good rule of thumb is that your age should represent the percentage or ‘low risk’ funds in your investment portfolio.

Your portfolio mix also depends on your financial goals and the time outlay that you have set for them. Saving for a car, for example, is something that you would like to do in the near future. So, it would be best if you invest your money in a number of safe investments so you can withdraw it without incurring any losses. If you’re saving for retirement, on the other hand, you should consider giving a greater share in your portfolio to equity mutual funds or stocks in companies whose businesses you know and trust – while they might suffer price fluctuations in the short term, they will offer fantastic growth in the long term.

There is no secret formula for a perfectly balanced investment portfolio. It depends on your goals and your appetite for risk. Take some time to think about what you want from your money before you invest it – you’ll be surprised by your own success!

 

2 Comments

  1. Thanks for writing these articles for the greater good of women. You’re doing an awesome job..!! It would be helpful if you could explain about Derivatives in your upcoming blog posts.

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