First of all you need to have a Goal, and an Investment Philosophy Statement. The first statement tells you what are your goals – in actual terms, with current prices and the price at the time of the execution of the Goal.
The Investment philosophy tells you how you will go about constructing the portfolio over a long period of time…
At this stage the Portfolio construction starts….Let us look at the 4-5 important steps…
1. Your Investment Philosophy Statement has already told you what is your targeted asset allocation: Now go about building the same! Once we assume that your risk profiling, timing of goals etc have been considered…we have decided on the amount of debt and equity in the portfolio…this is a good place to start.
2. Choose the funds: Assuming that you will only choose mutual funds, now is the time to choose the schemes in which you will do a SIP. Let us say you want to invest 70% in equity and 30% in debt. Assuming that your debt requirements you could choose a large cap fund, and a multi cap fund. (this is really a separate post).
3. Following the Investment Philosophy statement: Keep reassessing your portfolio and decide when to re-balance the portfolio. Portfolio construction is all about making a proper IPS and following it.
4. Get it reviewed by a peer or by a professional: If you are a DIY investor you SHOULD engage the services of a good IFA / friendly fund manager to review the portfolio that you have created. This is necessary to ensure that you do not break your own rules and laws. More and more that I meet people the more I am convinced that self discipline is more in breach.
5. Change strategy: If you are not sure that you are going in the right direction, and the asset allocation is too aggressive or too conservative – seek professional help – sometimes doing ‘nothing’ could be the best option. However in our anxiety we may make some unnecessary changes, be careful.
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