There is enough coverage every day in the media, various discussion fora, etc. relating to guidance on investment-portfolio construction. This may confuse you.

Ideally, you should take professional guidance from an investment advisor. If you are doing it yourself, you can go by the following simple tenets.

Risk-return profile

There are asset classes where you invest. These are equity stocks, bonds, gold, etc. You expect to get back a higher amount later for the investment you are making today.

The difference between the asset classes is in the risk-return profile. There are varying degrees of risk in these asset classes, and varying return expectations, as per historical track record of the asset categories. The risk is, you may not get the expected return from the investment.

The way to invest is either do it yourself or do it through an investment vehicle. You can purchase equity stocks, bonds/debentures, gold (physical or financial form), etc. on your own. Nowadays, with everything available online, it is easy to execute.

However, it is not only about execution. It requires you to understand what you are getting into. And that requires bandwidth, time, and expertise. To overcome this, there are investment vehicles, like mutual funds.

An investment vehicle will charge you fees, as they have to exist commercially. The returns you get are net of expenses charged by the fund. There is a reason you pay the fees; it is not possible for you to do everything yourself.

Mutual funds have multiple fund categories (large cap, small cap, etc.) and various strategies (active, passive, etc.) from which you can choose.

Diversified portfolio

The basic principle of portfolio construction is diversification, and allocation to various assets in a ratio that suits you. This is the most important piece of the equation. Various asset classes behave differently in different market situations.

This is known as a negative correlation. Though it is not a perfect negative correlation i.e. minus 1 or minus 100 per cent, to whatever extent it is there, it helps.

It balances out the phases of market volatility in the portfolio. In other words, it makes the investment journey smooth. When the market movement is adverse and you are looking at the investment-account statement, it would look more palatable.

The adverse performance of an asset class is balanced out by the stable performance of another. The big question is, which allocation ratio is suitable?

Equity is the preferred asset class, hence you can have a higher allocation there. You are participating in the great Indian growth story. Along with the growth of the economy, as the corporate top line and bottom line growth, you get the benefit over an adequate period of time.

The thumb rule is allocation to equity in your portfolio should be 100 minus age. For example, if your age is 40, allocation to equity should be 60 per cent. Bonds or debt schemes of mutual funds are relatively more stable in performance.

Gold is a good portfolio diversifier; in times of global market uncertainty, gold tends to do well. Currently, the concept of de-dollarisation is gaining ground, which is positive for gold. However, gold, per se, is not a productive asset — it does not produce any economic value.

When you buy equity stocks, there is a company that is producing economic value, and the company is growing.

Allocation to gold

Hence, allocation to gold should be say 10 or 15 per cent of the portfolio, but not on the higher side. Going by the thumb rule mentioned earlier, if your age is 40 and you agree with an equity allocation of 60 per cent, then, you may have, say, 25 per cent to 30 per cent in bonds/debt funds and 10 per cent to 15 per cent in gold.

There is a need for a liquid component in the portfolio, which can be easily encashed in times of need. This would be 5 per cent to 10 per cent, depending on the value of the portfolio. This may be part of the debt allocation and parked in liquid funds of mutual funds or bank deposits.

Insurance is must

That was broadly about the portfolio composition. Besides, there is a need for insurance to take care of the family if something happens to you.

This should be done in the form of term insurance, which is a pure insurance cover. It is advisable not to mix insurance with investment e.g. ULIPs or conventional insurance policies combining investment with insurance.

Not only life but there is also a need for health and accident insurance as well, for which you can buy appropriate policies.


You would be bombarded from various quarters on how to enhance returns, how to optimise your portfolio, “multi-bagger ideas” etc. The point is, if you do not understand or are not convinced about something, you should not put your hard-earned money into it.

It could be investment ideas about loss-making companies becoming “future kings,” or cryptocurrency giving you multiple times returns, etc.

Just keep it simple, and enjoy your life. If you do not understand or are not convinced about something, you should not put your hard-earned money into such investments.

(The writer is a corporate trainer and author)