Too many young individuals put off or completely forget to make retirement investments. It can be hard to imagine, let alone care about, a date that is thirty or forty years in the future. Additionally, investments are sometimes the greatest way to increase retirement income (if any) in the absence of employer-guaranteed pensions and a small amount from savings; otherwise, future retirees will frequently struggle to pay for essentials.

Understanding Portfolio Building

Starting with an investment portfolio can be somewhat intimidating to new investors in India, who might not be completely aware of the difficulty involved in financial markets. Nevertheless, taking time to grasp some significant approaches will help you put together a portfolio that is strong enough to match your investment goals and attitude of accepting risks.

1. Identify Your Risk Tolerance

Knowing your risk tolerance is important to developing your investment strategy. Such risk tolerance is personal and varies depending on age, income, and liabilities. SEBI indicated that about 60% of Indian investors lean toward less risky investments. Being aware of your comfort level with fluctuations in the market will help you choose the right investments, ensuring you remain confident during market turmoil. You can refer to this link to check your risk tolerance: https://docs.google.com/forms/d/e/1FAIpQLSd261_aqybIekp7VlUOykM2o3C8r6DM8PUkt65mWrOZdV5JRg/viewform

2. Emergency Fund Consideration

It is one of the most important steps before creating an investment portfolio. One should keep 3-6 months of living expenses in an emergency fund before investing. An emergency fund gives you financial stability if you lose your job or suddenly need to cover medical expenses without needing to cash out an investment prematurely. For instance, if a person had monthly expenditures of ₹25,000, he would be looking at an emergency fund of at least ₹75,000 and not more than one and a half lakh rupees either in liquid mutual funds or in a high-yield savings account.  

3. Diversification is key

Diversification means spreading one's assets among different classes to mitigate risk and maximise reward. Stock, bonds, real estate, and gold would be present in the most diversified portfolio. In a longer-term growth strategy, perhaps 60-80% allotted to stocks should afford a good return, leaving 20-40% of the remaining funds in lower-yielding investments like bonds to keep things stable. Simran could have diversified by putting money into blue-chip stocks with some mutual funds and gold ETFs to level off her risk. 

4. Having a Clear Financial Goal

Setting specific tangible financial goals compliments your investment strategy. Determine if you are saving for short-term needs such as a vacation or for long-term goals such as retirement or a child's education. For example, if you plan to buy a house in five years, you will most likely set aside your investment in safer instruments like fixed deposits or short-term debt funds. On the other hand, retirement savings investments with a 30-year horizon can tolerate a higher equity allocation as they serve the purpose of growth. 

5. Tax Efficiency and Investment Strategy

Investors ought to prioritize tax efficiency when constructing their portfolios to enhance post-tax returns. Within the previous tax framework, tax-saving instruments such as ELSS (Equity-Linked Savings Scheme), PPF (Public Provident Fund), and NPS (National Pension System) allowed for deductions under Section 80C (up to ₹1.5 lakh), in addition to supplementary benefits for NPS under Section 80CCD(1B) (an extra ₹50,000). ELSS funds, which come with a 3-year lock-in, provide both equity exposure and tax advantages, while PPF guarantees secure, tax-exempt growth. The new tax system presents reduced tax rates but removes most deductions, rendering tax-saving investments less appealing. Therefore, investors must evaluate their tax obligations and select the regime that best aligns with their financial objectives.

6. Avoid Behavioural Bias

Behavioural biases, like fear of loss, regret aversion, overconfidence, and herd mentality, can lead to poor investment decisions. To avoid these, stick to your strategy, focus on long-term goals, and avoid impulsive reactions to market fluctuations. A disciplined approach and regular portfolio reviews help mitigate emotional decisions and keep you on track with your financial goals. If biases persist, consulting a financial advisor can provide an objective perspective and prevent emotionally driven mistakes.

7. Selecting the Right Asset Location and Creating a Long-Term Equity Portfolio Based on Risk Profile

Asset allocation consists of allocating the total available capital among different classes of assets, such as equity, bonds, or cash equivalents, based on the risk appetite and the maximum possible period for investment. For example, a young investor might invest 80% of his portfolio in equities for growth while distributing 20% in safer assets like bonds or cash equivalents. For example, assuming Rohan, who is 30, wishes to retire at 60, he could invest primarily in equity mutual funds in the beginning and then switch to bonds as he nears retirement to preserve capital. 

For long-term equity portfolios, more risk-prone investors can invest a higher percentage in equities, while conservative investors can invest in solid, blue-chip stocks. A long-term equity portfolio is appropriate for investors who can hold on through market volatility for long-term growth. Aligning equities with risk tolerance and having a long-term perspective can assist in reaching monetary goals.

8. Analysing Stock Trends 

Analysing stock market trends can be a good way to understand how the stock market works. It also shows how various stocks are impacted by certain events. Although it can be challenging, understanding stock market patterns is not impossible. Researching the kinds of stocks available in the market and how individual stocks fluctuate about the market as a whole can be your first step. This can assist you in both identifying potentially profitable investments and avoiding excessively risky ones. Additionally, you can consult a financial advisor to monitor developments in the stock market, who can analyse market volatility, spot trends, and come to wise decisions.

9. Mutual Funds and ETFs for Consideration

For many Indians, SIP or lumpsum in mutual funds and exchange-traded funds (ETFs) will prove the most appropriate for providing diversification without needing extensive knowledge about the market. Mutual funds and ETFs pool the money of many investors and enable them to invest in a much more diversified portfolio managed by professionals. For example, Amit, a software engineer, could invest in an index fund that traces the Nifty 50, giving them exposure to those top-performing companies in India within a tight budget. This strategy suits those like Amit who want to keep the entire exercise passive yet participate in the growth of the stock market. 

10. Stay Informed and Analyse Famous Investors' Portfolios

It is critical to keep informed about market developments through trusted sources to make informed investment decisions. Begin by reading an educational book or taking an online course that offers basic investing lessons. “SEBI investor awareness program” is a free program launched by SEBI on awareness about the stock market. For example, understanding how mutual funds work will surely enhance your confidence in making investment decisions. Also, analysing the portfolios of prominent investors will give priceless support to your investment education. Studying their investment decisions and dynamics would assist you in understanding how to make better decisions and modify your portfolio according to market circumstances in the long run. 

11. Regularly Review and Rebalancing Your Portfolio

A periodic rebalancing of the portfolio allows you to keep your investment goals and risk tolerance in check. Changes in the market can create deviations from the planned principal investment allocation. For instance, if equities do well, their weight in the portfolio may be above what was planned. An investor like Neha may choose to sell some equity to reinvest in bonds or cash equivalents to maintain a desired asset allocation of 70% equities and 30% fixed income. 

❖ A Step-by-step Guide to Start Your Investment Journey

For individuals new to investing, the initial step involves establishing a Demat and trading account with a SEBI-registered broker. This account is essential for purchasing and maintaining stocks, mutual funds, and ETFs. Upon completing the KYC (Know Your Customer) process, which necessitates PAN, Aadhaar, and bank information, link your bank account to facilitate smooth transactions. Subsequently, determine your investment strategy—whether to invest in stocks, mutual funds, ETFs, or bonds—tailored to your risk tolerance and financial objectives. For those starting, index funds or blue-chip stocks are good for their stability. It is crucial to utilize investment platforms or financial advisors for strategic guidance and to remain updated on market developments. Consistent monitoring and disciplined investment practices will assist you in nurturing a prosperous financial future. You can open your demat account with us at: https://ekyc.daycoindia.com/

Building the investment portfolio takes a good amount of time, patience, and effort to begin proper planning. By assessing risk tolerance, establishing clear financial objectives, diversifying asset allocation, and optimizing tax efficiency, investors can construct a portfolio that reflects their long-term aspirations. Mitigating behavioural biases, remaining well-informed, and regularly rebalancing investments are crucial in ensuring that financial objectives stay aligned, even amidst market volatility.

-Sukalyan Halder & Marifur Rahaman