What should comprise a young investor's portfolio?
Posted by: Arti Bhargava on Feb 19, 2018, 06.30 AM IST
Arnav wants to invest his surplus income to build wealth. He and his wife live with his parents in their house. His friends suggest he buy a house and rent it out. His parents feel he should accumulate the savings in safe instruments such as bank deposits. His wife thinks they should buy gold jewellery and invest the rest. What are the factors that Arnav needs to consider before deciding? Given his current situation, what is the most efficient choice?
Arnav is still in an early stage of his career. The primary consideration should be ensuring flexibility to use the assets he will build, depending on his need. The objectives that should drive his choice are growth in value over time and liquidity to access the funds if and when needed. At this stage, Arnav could invest in a house if he plans to live in it, and not because he wants to rent it sell for a profit. Gold may turn out to be an illiquid investment and draw a high emotional price. Bank deposits are a safe choice, but do not provide growth in value.
Arnav may be better off choosing a mix of investments to ensure ready liquidity and higher flexibility. Arnav should take a wealth pyramid approach while building his portfolio. He should begin with low-risk, short-term, liquid and flexible assets. Locking his limited wealth in a house or in gold is not a good idea. He might face unexpected expenses, relocation, need to provide for child birth and hospitalisation, invest in higher education, or healthcare for his family. He should begin with bank deposits, term plans and short-term debt investments. He should then look at equity funds, preferably diversified equity funds, with a longer horizon in mind. He should add illiquid and high value assets only when he has built wealth that is at least equivalent to 2-3 years of his income.