Diversify and assess risk when building portfolio

People think and react differently when there is talk about investing. Some do not even allot much time to think and plan their investments. Financial advisors say investment planning is as important as earning. It's basically putting your money to work or at places where you might need it someday. There are various investment instruments available in the markets and one should give a serious thought to planned and informed investment decision-making. You should look at various investment instruments according to your needs and allocate funds accordingly.
These are some of the broad categories of instruments available in the markets:

Tax-savings instruments
Taxes drain a significant portion of an individual's hard-earned money. Therefore, one should look at using all possible ways to save taxes, especially those in the higher tax bracket. There are provisions for investments in various instruments which qualify for tax rebates. For example, one can invest in PPF, National Savings Certificate or tax-saving bonds. Getting into the last quarter, investors should look at various schemes and reduce their tax liabilities.

Insurance instruments
The thumb rule regarding investments in insurance is that an investor should have an insurance cover of at least five times of his annual income. One should also look at a balance between term plans and endowment plans to optimise the funds outgo and risk cover. It is advisable to take insurance cover during the early part of life to ensure lesser premium and higher risk cover. Health insurance is another area which should be seriously considered by investors who do not have appropriate health cover for themselves and their family.

Debt instruments
Debt-based instruments usually guarantee principal security. There are various classes of debt-based investment instruments available in the market. For example, deposit schemes (bank fixed deposits, post office deposits, company deposits), debt mutual funds, saving schemes (PPF, NSC) and liquid funds. Debt instruments should be part of every investor's investment portfolio. Inclusion of debt-based investment instruments provides stability to a portfolio and reduces the overall risk. However, the percentage allocation towards equity and debt-based instruments should depend on the risk profile of the investor and prevailing market conditions.

Equity-based instruments
There are various schemes and investment instruments available in the market in this category. There are two broad categories - direct investments in stocks or indirect investments by way of mutual funds. Those who have time and adequate understanding of the markets should look at the direct investment method. Others should look at investments through mutual funds. Investors should look at diversification by investing in many mutual funds and the investment decision should not be driven by past statistics only as they might be misleading at times.

Gold
Investments in commodities, especially gold, have found favour in recent times. The gold-based investments add another dimension to a portfolio. It acts as a debt instrument and usually provides good returns during uncertain economic conditions. The investments in gold can be through various gold funds or buying gold bars from the market. Buying gold ornaments should be treated as consumption rather than an investment.

Source:http://economictimes.indiatimes.com/features/financial-times/Diversify-and-assess-risk-when-building-portfolio/articleshow/5382176.cms

Time to review your portfolio

New Year eve always brings in hope in addition to excitement. It is time for retrospection, resolutions and perhaps making new road maps. Among other things in life this is true for your investments too. It is time to review your portfolio and plan for the new year ahead to achieve even higher ground.

Tax planning investments
The first quarter of the calendar is incidentally the last one for the financial year and hence it is usually heavy with investments in tax-saving instruments such as specified mutual funds, provident funds, tax-saving bonds etc. However, if you are going to do most of your tax-related investments in the last three months then you should resolve for the change in this habit next year.

It is prudent to plan your tax-related investments right from the start of the financial year. For instance, provident fund investments should be made before fifth of every month to reap maximum interest and compounding benefit. In the same way, mutual fund investments can be made through a systematic investment plan (SIP) to average out the market ups and down and keep the cost low. Hence, doing it evenly throughout the year not only keeps you off the last minute burden but also helps you reap much higher returns.

With the economy showing signs of revival, there is definitely going to be lot of buzz in the stock markets. We are most likely at crossroads when change in due. But, change is always uncertain and slow to occur. All you need to do is to stick to the basics with this asset class in these times.

What this means is that you will have to work harder to dig deep, do your due diligence to find the value picks. Prudence would demand that you stick to core sectors such as infrastructure, auto and pharma where you can monitor the growth and all you need to do is spot the value picks in the sectors.

A lot would depend upon how factors such as the monetary policy, union budget, monsoons, and inflation here, as well as the US interest rates and foreign institutional investor (FII) inflows behave, and that will determine the direction of the markets. So watch these windows as the action unfolds in the next 12 months.

One good thing about mutual funds is the fundamental advice of sticking to the systematic investment route remains unchanged irrespective of the investment climate and time. So, it is the advice this time too - to stick to this fundamental principal to reap the best benefit of this asset class.

However, stay away from any exotic theme funds and even the new fund offers unless they provide good reasons. There is a plethora of existing funds to choose from.

All that glittered in the past few months was indeed gold. However, it may not continue to do so forever. One must treat investments in gold primarily as hedging simply because of its impeccable track record of over 2,000 years as a store of value.

Any attempt to go overboard and treat the asset like equity to make money in the short term would be a hasty move. Do not forget that it has given good returns in the past few months because other assets haven't , and that is its primary job as a hedge in your portfolio.

Any move to divert higher funds to gold at the expense of other assets would also mean bigger opportunity loss. Hence, resist the temptation and stick to the basic rule of keeping gold to about 15 percent of your portfolio.

Source: http://economictimes.indiatimes.com/quickiearticleshow/5384346.cms

A year for all asset classes

The Indian investor would have generated healthy portfolio gains this year; with no asset class acting as a drag on the other.

The year witnessed a rise in valuations across asset classes such as equities, gold and realty.

If 2008 was a year when most asset classes failed to perform, 2009 was one when almost every popular asset class provided an opportunity to build wealth. Be it equities, debt, gold or real estate, the Indian investor would have generated healthy portfolio gains this year; with no asset class acting as a drag on the other.

Surprised? Well, here's how you would have made a quick buck by just staying invested round the year, across asset classes.

Debt for all seasons

Take the simple time-tested debt option; fixed deposits with banks. Looking back, you would be surprised to know that these fixed return investment havens lured investors with interest rates as high as 12 per cent in end of 2008. Of course, the beginning of any lucrative offer or rally is often overlooked.

Even if you had been a late entrant and missed the 12 per cent rates, locking in to fixed deposits in January 2009 would have still guaranteed an 11 per cent interest rate.

Missed the bus there and watched bank interest rates sadly dwindle? Never mind, a series of non-convertible debentures issued by companies such as Tata Capital, Shriram Transport Finance and L&T Finance at various time periods between February and August offered interest rates between 10 and 12 per cent. It's not just the interest rates that made these offers noteworthy. These non-convertible debentures (NCDs) are traded in the stock exchanges and can be sold anytime.

Take the case of Tata Capital NCD offered in February. It currently trades 22 per cent above its offer price. A rather neat return from a debt option.

And as if that was not enough, corporate deposits – tagged risky in the initial part of the year given the high leverage of their underlying companies – soon provided comfort with improving financials. Interest rates of 9-12 per cent offered (and still on offer) by many creditworthy finance companies such as Sundaram Finance or Mahindra Finance followed by a number of corporates ensured that investors were not short of good debt options for most part of the year.

Debt mutual funds too, played their part well in ensuring that investors were not disappointed.

Rich, richer …

If debt was not exactly your idea of building wealth, then let's move on the most-loved and at times the most-hated asset class – equities.

Returns of 120 per cent from the March lows would only have been a dream for many as few could have timed their entry in to equities in March, given the undercurrent of pessimism then. However, even if you had waited a while and invested sometime during May (when mutual funds too derived conviction to move fully in equities from their deep cash positions), chances are that you would have made a neat returns of about 50 per cent (returns generated by the broad market index CNX 500, during this period). And had you taken the mutual fund route, your returns could have been much higher.

Real opportunity

Not often do you get a real deal – when a reasonable property price and low home loan rates are offered at the same time. Well, 2009 is one such year.

While it would be hard to generalise, property prices were available at a bargain beginning February and extending up to June-July. To enable you to purchase at bargains, interest rates offered by banks also dipped to as low as 8 per cent (and still remains so). However, property prices, especially in the middle income offerings, were not available at discounts for too long as select areas across cities witnessed appreciation.

Between June and September alone capital values of residential properties in key cities such as Mumbai, Gurgaon and select parts of Chennai and Bangalore have seen a rise of between 10 and 25 per cent. Had you been among the smart investors who bought a property before June, you may already be sitting on substantial gains.

Not just property prices, homes loans with interest rates kept fixed for 3-5 years at 8-9 per cent could certainly be called some deal. And to think, a home loan would have cost you as much as 12 per cent a year ago. If that does not make an impact sample the difference in terms of EMI: A Rs 20-lakh, 15-year home loan at 12 per cent would have resulted in an EMI of about Rs 23,000 a month. At 8 per cent, there is a drastic reduction by Rs 4,000 a month to Rs 19,000.

The gold rush

Besides debt, if there was one asset class that endowed multiple opportunities to earn returns in 2009, it would have to be gold. Had you invested in gold (through exchange-traded funds) as early as January, this asset class would have yielded a good 20 per cent profit. Had you delayed your purchase to, say, June, the returns would have been 10 per cent – not too lucrative but nevertheless attractive for a safe asset class like gold that does not always generate returns that beat inflation.

So 2009 would certainly go down in history as one of those singular years where every asset class held by you added to your portfolio wealth; that is only if you had invested those cash holdings in to some of these options.

Source: http://www.thehindubusinessline.com/iw/2009/12/27/stories/2009122751081100.htm