In this article, we are going to discuss some of the basic rules for building a comprehensive financial portfolio. These rules are applicable to almost any type of financial portfolio

When it comes to financial well-being, having a well-structured portfolio is critical. Building a financial portfolio can be quite a daunting task, especially if you don’t know where to start. There are a few basic rules that can help anyone build a solid financial portfolio.

These strategies are applicable to portfolios of any size. So let’s get into it, here are 7 basic rules for building a great financial portfolio.

1. Make a Balance Sheet: A personal balance sheet is important to determine your present financial situation. Make a list of everything you own (e.g. house, cars, real estate, bank accounts, bonds, stocks mutual funds etc.) and everything you owe (credit card bills, utility bills, loans, etc.). Everything you own is considered Assets and everything you owe is considered Liabilities. The balance sheet is critical to the portfolio building process as you will be able to keep a check on your liabilities to make sure they are not disproportionately higher than your assets.

The balance sheet captures your financial position at the beginning of this process and can, therefore, show you your progress throughout the process.

2. Make some Safe Investments: There are a number of investment vehicles in the market today with varying levels of risk. Making some investments in instruments that carry low risk would be a smart decision for the long run. Some low-risk investments can be National Savings Certificates (NSCs), Fixed Deposits (FDs), Liquid Mutual Funds etc. These safe investments are good to keep for long term goals like retirement, children’s education, etc.

3. Pay off High-Interest Debt: Paying off debt should be done in a systematic manner, here is how:

  • From the balance sheet you have prepared, take all the debt and make a separate list. Arrange the debt from highest interest rates to lowest.
  • Determine how much you are prepared to put aside every month towards your debt reduction fund. If you are making contributions towards other investments like stocks or mutual funds and are carrying a large amount of debt, some of the payments towards these investments can be redirected towards your debt reduction fund.
  • Make the minimum payments for all your debt except the highest ranked debt in your list. The debt with the highest interest rate should be cleared off fast and, therefore, most of your spare capital should be focused towards it.
  • Repeat this process till all your debt has been paid off.

Paying off debt can take months or even years. The idea is to not accumulate more debt and to minimize high-interest debt. If the majority of your debt is credit card debt, once you have cleared the entire credit card bill do not cancel the card, this is adversely affecting your credit score. Credit cards are not inherently evil, they are actually a valuable financial tool if used wisely.

4. Make some tax-efficient investments: Section 80C of the Income Tax Act of 1961 provides you many avenues to make investments that can save you a lot on tax. These investments can reduce your tax liability by up to Rs. 1.5 lakhs. There are a number of investments under Section 80C, namely:

  • Tax Saving Fixed Deposits (FDs): Tax Saving FDs are like regular FDs but carry a lock-in period of 5 years. These FDs provide investors with interest returns between 7.25% per annum to 8% per annum.
  • Public Provident Fund (PPF): PPFs are government-backed long-term investments. PPFs carry a lock-in period of 5 years and provide returns of 8% per annum.
  • Employee Provident Fund (EPF): The EPF is designed to be a retirement benefits scheme. EPF currently amounts to 12% of an employee’s salary and can be opened by an individual with a salary greater than Rs. 15,000 per month. The PF balance can be withdrawn completely tax-free if the EPF is held for 5 years or more by the individual.
  • Equity Linked Saving Scheme (ELSS): Equity Linked Saving Schemes are schemes that are linked to Equity Mutual Funds. These schemes are relatively new and quite a popular investment option. The popularity of these schemes can be attributed to the high returns they provide investors, which in some cases, can be as high as 15%. ELSS also carry the shortest lock-in period of any investment under Section 80C, 3 years.

5. Purchase a Home: Saving for the downpayment of a home is a good idea. Buying a home can turn your expense “rent” into equity. There is another reason to take that home loan, interest paid on home loans is tax deductible up to Rs. 2 lakh. Real estate is also considered a good investment as it appreciates more often than it depreciates in value.

6: Build an Emergency Fund: Life is quite uncertain and there are a number of situations that can leave you without a source of income. It is very important to build an emergency fund just for these situations, most people would recommend having an emergency corpus of 3 months, but we’d suggest a 6-month saving i.e. your emergency fund should have at least 6-months’ salary in it. The main objective of creating an emergency fund is security not returns. Therefore, this fund should be parked in safe investments that can be redeemed quickly like, savings accounts, liquid mutual funds, etc.

7: Invest in yourself: While making a financial portfolio, it is extremely important to also invest in yourself. While you are building your portfolio take some time to do the things you enjoy. Take up courses that can help you move ahead in your career so that you can increase your income and reach your goals faster.

Remember, the most important rule that isn’t on this list is consistency. Stay consistent in your saving and investing habits and you’ll be on your way to financial independence in no time. I hope this article was helpful.

 

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