Our methods of investing will vary significantly from a portfolio manager. He will value the stocks and research about the company's management. He will further make his financial projections on this company.
What are the different instruments we can put our money on?
Equity Shares
Putting your money in companies. There are 3 types of shares – large cap, mid cap and small cap.
- Large cap companies have a huge market share and valuation
- Mid cap companies have a smaller market share
- Small cap companies have the smallest type of valuation
Large cap companies are often less riskier than small cap companies as they may have more corporate governance, better reporting and higher bargaining power.
Equity has 3 ways of investment:
- Mutual Funds – Collect money from multiple people and invest in stocks with portfolio managers
- Direct Stocks – Invest directly in company shares
- ETFs – Lower administrative expenses, allows stocks to be invested in a bundle
Fixed Income Securities
These are investments that give you a standard, regular amount of interest.
- Provident Funds give you tax benefits
- Term insurance has lesser premiums and better cover
- Liquid funds are unaffected by market interest rate changes
- Long term funds block your money longer and are more affected by rates
Before investing in these funds, be careful to check if they are government or corporate because that defines their riskiness.
Other Asset Classes
Cash: Holding too much cash doesn't make sense as the economy faces inflation.
Gold: Better investment if kept in demat form as it reduces storage costs. Treating jewellery as investments is not a good option.
Real Estate: Having your own house saves rental expense and can be considered a yield. It also gives you a sense of security.
Hedge Funds & Private Equity: For high net worth individuals. Hedge funds are for risky investments and private equity firms are where common public cannot invest.
We must remember that it is important to diversify our portfolio – do not put all your eggs in one basket.
Thumb Rules While Making a Portfolio
100 Minus Age Rule
If your age is 29 years, 100-29 = 71% of your money should be invested in equity and the remaining should go to fixed income. Plan your investment according to your expected expenses.
SIPs & Bulk Payments
Do SIPs and bulk payments in small and mid cap funds.
Conclusion: One should do their own research as their financial situation is at stake here. It is important to grasp the reality of these concepts and make your decision based on them.
