Financial portfolio - Key Considerations

Lets look into key considerations that needs to be addressed while building a portfolio:

Capital Appreciation: This is by far the single most important and obvious motive behind building a sound financial portfolio. Investments made should provide real growth post-tax and post-inflation over long period of time. Asset class selected has bearing on how much appreciation can be expected at long term over whole portfolio. While equity, real estate can provide
considerable growth over long term, other like FD, NSC etc. can barely negate negative impact of inflation.

Then there are factors like tax, inflation which erodes the value of portfolio. Inflation is a silent money killer. For example, with current inflation of around 8.5% your money should grow by at least at this rate for you to have the same purchasing power at the end of one year.  Regarding tax, different tax structure exists for different investments; PPF is currently tax exempted while others like Fixed Deposits (FD), National Saving Scheme (NSC) are taxed. Besides there are costs associate with different investment channels which bring down the value. For example, brokerage, exit loads etc.

Key questions

• Would the portfolio provide real positive growth post-tax and post-inflation?

• Does it have suitable investment channels to maximize appreciation?

• Are all tax and cost implications taken into consideration?

Goal Orientation: Every individual has separate financial goals and needs, thus his portfolio should specifically address those. There is no “one-size-fit-all” portfolio, otherwise we all could have followed the same portfolio template.

Based on different factors like age, family responsibilities, career choices financial goals vary – children education expense, building retirement corpus, buy house/car etc.

Key questions

• What is the purpose or goal of investments made?

• Does the portfolio provide ways and means to meet short, medium and long term financial goals?

Risk Management: Risk management is all about identification, assessment of effect of uncertainties or unforeseen events and taking actions to minimize, monitor the negative impacts thereof. When it comes to personal finance risk can come in different forms – accidents, medical problems, death, investment decisions gone wrong, financial market crash etc. Thus a proper financial plan should be resilient enough to manage and minimize the effect of such unforeseen events.

Key questions

• Do I have adequate life and medical insurance?

• Is it putting all eggs in one basket? Or is well diversified.

Liquidity: It’s another important consideration – how fast and easily an asset can be sold and converted into hard cash. These become important when cash is required in a short notice as in emergency. Liquidity depends on asset class and its form. For example in case of real estate liquidity is low.

Key question

• Does the portfolio contain liquid assets? What percentage?

While building a portfolio these are the most important considerations that needs to be addressed.

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