Tuesday, November 18, 2008

Conservative Portfolio

A conservative portfolio is one in which our main aim is capital protection. The gains may be small but the capital we invested would not erode in value. That is the reason why 75% or even more of the portfolio is invested in safe instruments. Only the remaining is invested in moderate risk to high risk instruments.

Let us have a look at some of the instruments that we can consider as safe investments:

1. Bank Fixed Deposits
a. Very Safe
b. Highly Liquid
c. Gives you a decent rate of returns (Upto 10% these days per year)

2. PPF - Public Provident Fund
a. Very Safe
b. Useful for long term investment because your money is locked in for 15 years
c. Gives you a decent rate of returns of 8% per annum which is compounded every year

3. NSC - National Savings Certificate
a. Very Safe
b. Useful for medium term investment because your money is locked in for 6 years
c. Gives you a decent rate of returns of 8% per annum which is compounded every half year

To know more about the Bank fixed deposits or PPF or NSC check out the article on Investing to Save Tax.

4. Gold
a. Very safe (You will possess the gold so nobody can deny money if you want to sell it)
b. Moderately Liquid - You need to find a buyer to convert your gold to cash

The specialty of Gold is the fact that, it may give you returns of as high as 20% per year but this is not a guaranteed return. It may go up or even go down. The only advantage of gold is that it is a precious metal which is under demand always and you can expect the prices to go up constantly. Since it has a small risk attached with it, make sure that your exposure to gold does not exceed 10% of your portfolio's net worth.

A Sample Conservative Portfolio:

This portfolio is for somebody who can invest Rs. 1 lac every year. You can adjust the amounts according to the amount you can invest.

PPF - 25% -> Rs. 25,000/- per year
Bank Fixed Deposits - 20% -> Rs. 20,000/- per year
NSC - 20% -> Rs. 20,000/- per year
Gold - 10% -> Rs. 10,000/- per year

Open a Systematic Investment Plan with a Diversified Equity fund or well managed ELSS fund for Rs. 2,000/- every month. Investing the SIP way is the best way to invest in Mutual funds because they average out the cost of purchase because we keep buying even when the maket is down.

Equity SIP - 25% (2,000 pm * 12 -> Rs. 24,000/-)

Net Total - Rs. 99,000/-

Stay away from direct Equity exposure.

Reason: Equity investment requires a lot of planning and careful stock selection and most importantly it involves a lot of risk. You are wondering by now that I have suggested a SIP in a Equity oriented mutual fund. That is because, Mutual funds are managed by professional fund managers who have a lot of expertise and time to manage the fund. Since we are going with a conservative portfolio it is better we avoid direct stock investments.

What Returns can you Expect out of this portfolio?

As we know, NSC & PPF give us a return of 8% per annum and Banks give us returns of upto 10% per annum. We will assume that gold would give us a 15% return per annum and the Equity SIP gives us a nominal 20% returns per annum.

PPF Amount at the end of one year - Rs. 27,000/-
Bank FD Amount at the end of one year - Rs. 21,800/-
NSC Amount at the end of one year - Rs. 21,632/-
Gold Value at the end of one year - Rs. 11,500/-

Equity SIP Value at the end of one year - Rs. 28,800/-

Net Portfolio Worth - 1,10,732/-
Amount Invested - Rs. 99,000/-

Returns on Investment = 11.85%

Happy Investing...

1 comment:

  1. Thank you very much for elaborating this tough task in very simple and disciplined manner.
    love to read your blog.

    Once again thanks.

    ReplyDelete

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