How to Build a Beginner-Friendly Investment Portfolio?

Define Your Financial Goals

Define your financial goals, know the ‘Why?’ behind your investments. This will help you create an investment strategy and portfolio that resonates with your end goal. Identify whether your financial goals are short-term, like a dream vacation, or long-term, like saving up for retirement.

Your financial goals will tell you the time horizon and the amount of money needed to reach that goal. Having all this information will help you decide what investment options offer the right return for your portfolio.

Identify Your Risk Tolerance

Understand how comfortable you are with market fluctuations. Young investors have a longer time horizon and hence can handle riskier investments such as equity, but older investors nearing retirement age may be risk-averse and opt for investments with lower risk.

All investments come with risks, but you need to identify your risk tolerance so you can choose an investment that aligns with your risk tolerance and financial goals.

Understand the Different Types of Portfolios

A good diversified investment portfolio should include a wide range of securities such as stocks, bonds, mutual funds and other securities. Understand how each of these works, the factors that influence their prices and the risk they carry. Compare these details to your own risk appetite, expected returns and investment duration to decide if they deserve a spot in your portfolio.

Maintain An Emergency Fund

It is recommended to have at least 3-6 months' worth of your living expenses in the form of cash saved up for emergencies. This is called an Emergency Fund, which will act as your safety net in case of a financial crisis.

An emergency fund offers peace of mind and protects from anxiety when your investments are down due to unfavorable market conditions.

Invest in Different Funds

As a beginner, you can start your investment journey by investing in different types of mutual funds and Exchange-Traded Funds (ETFs). Investing in mutual funds is a great way to introduce diversification to your portfolio.

In mutual funds, you can choose a fund that resonates with your risk appetite and financial goals. You can start investing via a Systematic Investment Plan (SIP), where you invest a fixed amount of money in your chosen fund weekly, monthly, or quarterly.

Since the mutual funds are managed by experienced fund managers, you don't have to actively monitor the market or make investment decisions. In mutual funds, your money is invested across various securities, lowering your risk exposure.

Diversify Across the Same Asset Class

Even if you choose to invest exclusively in one asset class, such as stocks, there is scope for diversification. You can diversify your stock portfolio by investing in multiple sectors such as IT, Manufacturing, Green energy, and healthcare. All these sectors offer different returns and carry unique risks. Having a blend of stocks belonging to different sectors will help manage your portfolio risk.

Diversify Across Different Asset Classes

If you prefer to diversify your portfolio by investing in different asset classes, you can add multiple assets such as stocks, bonds, mutual funds and metals to your portfolio. Most of these assets have an inverse relationship, where if one market falls, the other rises.

For example, when the RBI increases the interest rates, equity markets fall as high interest rates rise the borrowing costs for companies, which impacts their future growth. At the same time, since bonds are low-risk investments and now offer higher interest rates, investors shift from equity to bonds, lowering stock prices.

Determine Your Asset Allocation

Decide how much of your total capital should be invested in different assets in what proportion based on current market conditions, your financial goals and risk tolerance. For example, if you’re a risk-taking investor, you can invest 60% of your capital in equity markets, 30% in bonds, while the remaining can be invested in commodities like precious metals.

Review and Adjust Your Portfolio as Needed

Once you have built your investment portfolio, you need to regularly review its performance and tweak it based on market conditions. You need to adjust your investment strategy timely manner to ensure it aligns with your investment goals long term.