Choosing appropriate investments is important for achieving your life goals. But no less important is managing your portfolio’s returns.

After all, portfolio returns along with your capital contribution, enable you to accumulate wealth to achieve your life goals.

In this article, we discuss how your investment process can help you manage your portfolio income easily.

Portfolio returns You should pick investments that generate both capital appreciation and income returns to help you reduce your dependence on the market.

Your investment process should enable you to take profits easily to capture unrealised gains in your portfolio. Likewise, it should help you audit and earmark income returns for specific life goals.

Imagine that you hold a portfolio with seven bank fixed deposits, 10 tax-free bonds, eight mutual funds and 15 stocks. Also, you keep a day job that is unrelated to investment services. Will you be able to continually check if interest on bank deposits and tax-free bonds and occasional dividends on your mutual funds are duly credited to your bank account? Why is this important?

Like most investors, you could be practicing a system of mental accounting. That is, you treat income cash flows differently from cash flows generated from capital appreciation.

Specifically, if you are a retiree, you may prefer consuming income cash flows for living expenses but reinvesting cash flows from capital appreciation.

And if you are a working professional, you may prefer buying bonds with income cash flows from equity. So, tracking income cash flows become important.

Investment process To start with, you should hold fewer but sizable investments. Suppose your total interest income from bank fixed deposits amounts to ₹50,000 per month. Which would you prefer — ₹5,000 from ten different deposits or ₹50,000 from just three deposits?

Receiving ₹50,000 from just three fixed deposits makes you feel good because interest income from each investment is lumpy.

More importantly, it is easy to check whether the interest has been credited into your bank account when you have just three deposits than if you have 10 of them. Timely renewal is also easier when you have fewer deposits to monitor.

Further, investing in fewer deposits and receiving lumpy cash flows is better if you are a retiree. Such cash flows can be easily earmarked to meet your monthly living expenses, especially if you invest in monthly income deposits.

The argument is even more important with equity. When you buy dividend options of mutual funds, you may find it difficult to keep track of dividend credits to your bank account if you have numerous mutual funds.

And having fewer mutual funds comes in handy. The argument is no different if you hold individual securities in your portfolio.

Risk factor Holding fewer investments does not necessarily increase your risk. Or put differently, spreading your deposits among five banks may not significantly reduce your credit risk unless you choose banks that have business risks unrelated to each other. But doing that is easier said than done.

You can instead reduce your credit risk by investing with large public sector banks. As for equity investments, buy mutual funds or ETFs instead of individual securities.

Finally, maintain two investment-linked bank accounts — one to receive interest income and rental income, if any, and the other, to receive dividends and capital appreciation on your equity investments.

(The author is the founder of Navera Consulting. Feedback may be sent to > portfolioideas@thehindu.co.in )