How to Allocate ₹1 Lakh for a Diversified Portfolio
“Investing is better than saving.” I am sure you have definitely heard or read this line before or even multiple times. But the question here is not about saving and investing. The question is where to invest and how much to invest is safe in one category. Another famous tagline is “Don’t put all your eggs in one basket.” You have heard of this too. If not, that means that you have to invest your money in various assets. But why is there a need for diversification? Lets understand.
What is the need for a diversified portfolio?
I will give you the practical example that there are many people in the share market who have done well. But after the years, you see that they have nothing because of one crisis in the stock market, and they have lost all their money. Even many people who have invested their money in hope of a higher return lost all their money.
But now the question is, should you not invest in the risky things for the higher returns? and you should always invest in safe things. first of all, there are no such things when you are investing in equity; there is only a level of risk from low to high. You can go for the risky investments with the higher returns. But there is always the right way of doing things.
I’ll keep this blog concise and straightforward.
The Indian market & investment options
India’s investment market is as diverse as the country itself. The spectrum of investment options is wide and growing from traditional savings schemes like Fixed Deposits (FDs) to modern digital assets like cryptocurrency. We have multiple investment options, and now that the time has changed, you can open the demat accounts in just a few clicks and choose the options to invest. Let’s look at the options on our plate.
- Stocks/Equity: Investing in individual stocks can be risky but rewarding, as it means owning a part of a company. The stock market in India is strong, with many companies from different sectors selling shares. Investing in stocks can lead to good long-term returns, but it also carries risks that can change with market conditions.
So you should either research seriously or should take the help of the investment manager.
You can go through the article on Simple steps to Select the best Stocks
- Mutual Funds: Mutual funds are a popular choice for investors looking for moderate risk. individuals pool their funds and allocate them into various stocks and bonds professional managers oversee the investment process, making it a good option for those who don’t have the time or knowledge to manage their own investments. It is one of the best options for making an SIP (systematic investment plan). If you are salaried, you should make monthly SIP. You can read more on Choose the right Mutual Fund for your portfolio.
- Fixed Deposits (FDs): Fixed deposits are one of the safest and most traditional investments in India. They guarantee returns with very little risk. However, the returns are usually low, averaging around 5-7% per year.
Tip: You can start small FDs up to 5 lakh with Neobanks like Jupiter.
- Public Provident Fund (PPF): The PPF is a low-risk investment backed by the Indian government. It’s a long-term savings plan that offers tax-free returns, but you cannot access the funds for 15 years. If you are salaried, it is already there for you.
- Real Estate: Investing in real estate is seen as a stable choice in India. It requires a large initial investment and is not easily sold, so it’s better for medium- to long-term investment. Also, you should involve a trustworthy person before investing in real estate.
- Bonds: Bonds, whether from the government or corporations, are considered low-risk investments that provide steady, fixed returns. They are a good option for people who want safe investments with better returns than regular savings accounts.
- Cryptocurrency: Cryptocurrency is for those who enjoy high-risk investments. While it can offer very high returns, it is also one of the most volatile and risky options available right now. Only invest in the things that you understand. If you are confused with the crypto. Avoid investing in it.
- Gold: Gold has always been a preferred investment in India. It is seen as a safe choice, especially during tough economic times, but it’s usually considered low to medium risk for long-term growth. Now there are many options in the gold too. You can buy digital gold, ETF, or the Sovergin gold bond.
The Role of Risk in Diversification
A well-balanced investment portfolio includes a variety of assets from different risk levels. The main idea is to avoid putting all your money in one place. Different types of investments react differently to market changes, so by spreading your investments across high, medium, and low-risk assets, you can lower the risk of losing a large amount of money if the market goes down.
High-Risk Investments
High-risk investments can potentially yield high returns, but they also carry the risk of big losses. In India, examples include stocks, cryptocurrency, and some mutual funds. These investments are best for people who can handle more risk and plan to invest for the long haul. You should only invest the amount in this category that you can bear to lose.
Medium-Risk Investments
Medium-risk investments strike a balance, offering decent returns with a reasonable level of risk. This category includes diversified mutual funds, real estate, or balanced funds that invest in both stocks and bonds. These assets are suitable for those who want to aim for good returns while still protecting some of their capital. Can be good for the long term too.
Low-Risk Investments
Low-risk investments focus on keeping your money safe rather than chasing high returns. Options like fixed deposits, the Public Provident Fund (PPF), and government bonds fit here. These are great for conservative investors or those nearing retirement who want to avoid losing their money.
Building a ₹1 lakh diversified portfolio
Let’s say you have ₹1 lakh (₹100,000) to invest. To create a balanced portfolio, you can divide your money into high, medium, and low-risk categories based on your comfort with risk and your financial goals. Here’s a suggested breakdown:
High-Risk Investments (30% – ₹30,000)
Stocks (₹15,000): You can invest in a mix of large, mid, and small companies. You can invest in stable companies. These stocks are generally stable but still come with market risks. For selecting stock, you can refer to the
Equity Mutual Funds (₹15,000): Investing in riskier mutual funds can also be a good option, as they have performed well in the past. You can compare mutual funds first, then pick one or two of them.
Medium-Risk Investment(40%-₹40,000)
Balanced Mutual Funds (₹30,000): These funds mix stocks and bonds, providing both growth and safety.
Corporate Bonds (₹10,000): These are loans you give to companies in exchange for interest payments. They offer better returns than government bonds, but they’re also riskier.
Low-Risk Investments (30% – ₹30,000)
Fixed Deposit (₹15,000): A safe choice, fixed deposits provide guaranteed returns at a lower rate. Many Indian banks offer interest rates between 5% and 7% yearly.
Public Provident Fund (₹10,000): PPF is a government-backed savings scheme that provides tax benefits and guaranteed returns, making it a very safe option.
Government Bonds (₹5,000): These bonds, issued by the Indian government, offer stable and secure returns, perfect for conservative investors.
Tip: You can also invest in gold to hedge your portfolio.
Rebalancing Your Portfolio
After setting up your portfolio, it’s important to regularly check and adjust it. Markets change over time, and an investment that did well last year might not do the same this year. Rebalancing means adjusting your investments to keep your risk level in check. For instance, if your stock investments have increased a lot, you might sell some stocks and invest that money in safer options like bonds or fixed deposits.
Whenever you sell stocks, you can place your money into liquid funds if the waiting period is for 1-2 months or more.
The Power of Compounding
One of the most powerful benefits of long-term investing is the magic of compounding. This means that the returns you earn on your investments can themselves generate returns over time, leading to exponential growth in your wealth. Compounding works best when you reinvest your profits and stay invested for the long haul.
Here’s a Power of Compounding Table that shows how an investment grows over time due to compounding. Let’s assume the following:
Monthly SIP amount: ₹10,000
Annual interest rate: 15% (1.25% per month)
Investment period: 20 years
This table shows how your total investment and the compounded amount grow year by year.
Year | SIP amount | Total invested | Future value |
1 | ₹ 10,000 | ₹ 1,20,000 | ₹ 1,30,211 |
2 | ₹ 10,000 | ₹ 2,40,000 | ₹ 2,81,354 |
3 | ₹ 10,000 | ₹ 3,60,000 | ₹ 4,56,794 |
4 | ₹ 10,000 | ₹ 4,80,000 | ₹ 6,60,437 |
5 | ₹ 10,000 | ₹ 6,00,000 | ₹ 8,96,817 |
6 | ₹ 10,000 | ₹ 7,20,000 | ₹ 11,71,195 |
7 | ₹ 10,000 | ₹ 8,40,000 | ₹ 14,89,682 |
8 | ₹ 10,000 | ₹ 9,60,000 | ₹ 18,59,366 |
9 | ₹ 10,000 | ₹ 10,80,000 | ₹ 22,88,478 |
10 | ₹ 10,000 | ₹ 12,00,000 | ₹ 27,86,573 |
11 | ₹ 10,000 | ₹ 13,20,000 | ₹ 33,64,738 |
12 | ₹ 10,000 | ₹ 14,40,000 | ₹ 40,35,846 |
13 | ₹ 10,000 | ₹ 15,60,000 | ₹ 48,14,838 |
14 | ₹ 10,000 | ₹ 16,80,000 | ₹ 57,19,056 |
15 | ₹ 10,000 | ₹ 18,00,000 | ₹ 67,68,631 |
16 | ₹ 10,000 | ₹ 19,20,000 | ₹ 79,86,930 |
17 | ₹ 10,000 | ₹ 20,40,000 | ₹ 94,01,076 |
18 | ₹ 10,000 | ₹ 21,60,000 | ₹ 1,10,42,553 |
19 | ₹ 10,000 | ₹ 22,80,000 | ₹ 1,29,47,904 |
20 | ₹ 10,000 | ₹ 24,00,000 | ₹ 1,51,59,550 |
As you can see, after 20 years, your ₹12,00,000 investment grows to ₹46,41,654 due to compounding at a 12% interest rate.
This table highlights how compounding accelerates growth, especially in the later years, when your returns start earning more returns. The key is to stay invested for a longer period to make the most of compounding.
Conclusion
Diversification is a must for any portfolio, but diversification can be as per a person’s goal and the stage of the life he/she is in. like the younger generation can take risks, but the older generation can’t take much risk at their stage of life. A single person has more risk appetite than the person with the family. So always choose the diversification according to your needs and goals. Also, the allocation of money in the asset should be first discussed with the advisers.
Whenever you sell stocks, you can place your money into liquid funds if the waiting period is for 1-2 months or more.