Building a financial portfolio with minimal financial risks

Team Udayavani, Mar 12, 2023, 10:52 AM IST

Many people are rushing to close their investments for the current financial year as the fiscal year-end is just around the corner. In this rush, people often invest without really understanding the impact of their investments in the long term.

The economy currently is on the brink of a recession and it is important for investors to understand the impact it can have on their finances. Investors should take cognisance of the fact that it is important to diversify their portfolios with a mix of equity, debt, and hybrid investments to balance out the risks in the market and ensure good returns from all investments.

Debt investments or fixed-income investment instruments are those that provide a fixed and periodic income in addition to returning the principal investment amount at maturity. These are more commonly in the form of bonds, corporate FDs, and NCDs.

How do you, then, plan your investment portfolio by initiating investments in instruments which would provide fixed and assured returns? Here’s what investors have to look out for:

Identify your risk appetite

It is important for you to identify how much risk you are able to tolerate and plan accordingly. While fixed income instruments provide lower rates of returns than the equity market, it also provides lesser risks in investments. Investments such as Corporate FDs provide interest rates higher than that of a bank fixed deposit and hence are seen as lucrative options.

Identify your investment goals

It is never advisable to invest for the sake of saving tax or to fulfill obligatory investments. Always identify your investment goals, be it long-term or short-term. If you are looking for a long-term investment with a regular income, bond investments would be the right choice for you.

Understand rates of interest

Bond investments have an inverse relationship to interest rates. When the rate of interest increases, it invariably leads to an decrease in the price of a bond. In the current situation, with repo rates increasing periodically, bond investments are a good option for investors as yield rates increase as interest rates go up.

Portfolio Diversification

In times such as these, the focus is heavily skewed towards equity investments such as Mutual Funds and the stock market. However, it is important to ensure that you have a diversified portfolio to minimize the risks involved in your investments by looking at options such as corporate fixed deposits, bonds and NCDs.

No matter what, it is important to plan your portfolio keeping in mind the current economic environment and include fixed income investments in order to balance out the unpredictability of risk-heavy investments.

When planning your portfolio with fixed income investments as the financial year comes to a close, here are some factors to consider:

Assess your risk tolerance: Fixed income investments typically offer lower returns than equities but also come with lower risks. However, within the fixed income category, different investments carry different levels of risk. Therefore, it’s important to assess your risk tolerance and invest accordingly.
Determine your investment goals: You should also consider your investment goals when selecting fixed income investments. For instance, if you need a regular income stream, you may consider investing in bonds that pay a fixed interest rate or dividends. On the other hand, if you are looking for capital preservation, you may opt for short-term fixed income investments like money market funds.
Consider interest rates: Interest rates play a critical role in the performance of fixed income investments. When interest rates rise, bond prices tend to fall, and when interest rates decline, bond prices tend to rise. Therefore, it’s important to consider the current interest rate environment when selecting fixed income investments.
Diversify your portfolio: It’s important to diversify your fixed income investments to minimize risk. You can achieve this by investing in different types of fixed income securities, such as government bonds, corporate bonds, municipal bonds, and high-yield bonds.
Monitor your portfolio: Finally, it’s important to regularly monitor your fixed income investments and make adjustments as and when necessary. This could involve rebalancing your portfolio, taking profits on investments that have performed well, and cutting losses on investments that have underperformed.

In summary, to plan your portfolio with fixed income investments, you should assess your risk tolerance, determine your investment goals, consider interest rates, diversify your portfolio, and regularly monitor your investments.

Authored by Abhijit Roy, CEO and Co-Founder GoldenPi Technologies