Every investor aspires to attain a specific set of financial goals that may range anywhere from short, mid to long term. For each of such financial goals, a personalised financial plan is a must, based on your risk appetite level. In case you are a risk averse investor looking to form a low-cost investment portfolio, then this article is for you. Continue reading to understand how you can create a low-cost portfolio.
One of the crucial things that you must note while forming a low-cost portfolio is to ensure it is properly diversified. A well-diversified portfolio safeguards your overall portfolio returns from witnessing a negative return in case of underperformance of one asset class owing to sharp market movements. One of the best ways to attain optimal portfolio diversification is by using the asset allocation strategy i.e., investing in a wide range of low-risk assets so that the overall risk of the portfolio is under your tolerance level.
How to form a low-cost investment portfolio using ETFs and balanced advantage funds?
When it is about investing to form a low-cost portfolio, the initial measure you must do is determine your asset allocation strategy. Equity is an integral part of your portfolio. Even if you are forming a low-cost investment portfolio, you must ensure to add equity to your portfolio with the vision to remain invested for the long term. As a rule of thumb, it is recommended to have a little allocation in gold too given it serves as a useful hedge against global risks and inflation. So, you must consider allocating 5-10 per cent of your investment portfolio to gold in form of gold ETFs. The rest 90-95 per cent of your investment portfolio must be allocated towards debt funds and equity fund, or an instrument that invests in both asset classes like a balanced advantage fund.
Note that to form a low-cost investment portfolio, ETFs and balanced advantage funds are recommended owing to their high liquidity and diversification features. ETF is a basket of securities that are traded over the stock exchange and replicate an index. As they are listed on the stock exchange and trade just like stocks, they offer real-time settlement and liquidity. As an outcome, ETFs aim to generate a similar performance as their underlying index. Today, ETFs are available in distinct asset classes – gold, debt, or equity funds.
In debt, you can consider investing in liquid ETFs. For the equity portion, you may wonder where you should allocate your investible fund. Should you opt for a mid, large, or small cap or should you invest in thematic? Ensure to invest as per your requirement and risk appetite. If you can take a slight risk then you may opt for small-cap or mid-cap equity and if you are not a risk taker, then you should stick with large-cap equity. Whatever you may decide, remember that there are a variety of ETFs available, which you can use to form a low-cost investment portfolio. In case, you want to add geographical diversification to your investment, you can check out various offerings in ETFs too.
If you are one of those, who want to invest in a financial instrument that invests in both i.e., debt and equity, you can opt for balanced advantage funds. Also, known as dynamic asset allocation funds, they are flexible and even tend to allocate capital according to market conditions in debt or equity instruments. So, if you have opted for a well-managed balanced advantage fund for your investment portfolio, then these funds may perform well during volatile market conditions too.
A well-diversified investment portfolio is crucial for your success as an investor. As an investor, you must know how you can determine a prudent asset allocation strategy that best meets your risk appetite level and investment goals. As mentioned above, to form a low-cost investment portfolio, you must ensure to opt for low-risk financial instruments, which are ETFs and balanced advantage funds. Both these options assure to provide you with high liquidity, diversification, stable returns, and the benefit of minimal monitoring.