6 questions to answer when constructing your portfolio

It is not unusual for individuals to want to start investing, but are clueless as to where to begin. The start of the financial year (April 2022) is a good time to get cracking. Answering these questions should get you started.

Q 1: Does money slip through your fingers?

Here’s something to cheer you up. It is not that you are unable to save, the issue is that you are unable to track your spending. By examining where your money goes, you can identify patterns in your spending and zero in on your problem spots.

I could tell you to write down each and every instance where you spend money, and the exact amount. And, chances are that even if you obediently follow my instruction, you will give up after a day or two. I managed to do so only for a week before giving up.

Here’s an easy way out. At the end of every day, fill in the amount spent in three broad categories: Travel, Food, Other. This is much more doable. Just try it out for three months at least. Being aware is the first step, and you may be in for some surprises. Once you see where the money is going, you can tweak your spending accordingly. 

Additional Reading: Why can't I save?

Q 2: What do you want your money to do for you?

I thought this is a great substitute to the question, why are you investing?

If you don’t have a “why” that lures you, you will find it extremely difficult to save. And even if you make a start, you may struggle to keep up the momentum. Understanding why you are saving money is pivotal to staying on track.

Getting clear about what really matters to you is incredibly important, and not as simple as it appears. Inadvertently, we tend to copy the desires of another.

Take retirement. Almost everyone says that their goal is to travel in retirement. I remember a professional stating that she dislikes travelling. Her idea of having fun is not about packing your bags and going somewhere, after doing loads of research. She was afraid to voice it because the normal reaction would be one of mockery.

Someone mentioned to me that fear is his biggest motivation. He is not concerned about travel during retirement, but he is terribly afraid of being old and broke. That keeps him motivated to save for retirement. I don’t encourage negative imagery, so I would rather imagine myself happy and secure and comfortable in retirement and use that image to keep me motivated.

Your goal may not be retirement, but surely there is something you want to do? Buy a bike. Save for a home. Do a safari in Africa. Buy the latest Apple gadget. Start from this positive note.

Additional Reading: A guide to achieve your goals

Q 3: Is debt holding you back?

Before investing, take a look at your debt servicing outflows. Instead of investing, it may make more sense to pay down existing debt. Falling behind with debt is a huge roadblock to financial freedom.

When you service your credit card debt of around 24% per annum, be extremely mindful of the fact that this debt costs you a lot more than you can ever earn elsewhere. Even if you are servicing a much cheaper loan – say 12% per annum, once you clear it there is an immediate return there.

Additional Reading: Here's how to get out of debt.

Q 4: How much must you save?

This one is tricky because everyone’s situation is different. An acquaintance earns extremely well. I naturally assumed that he is saving a huge amount. He recently informed me that he is servicing a home loan for the house his parents reside in. In addition, he pays rent for his place of residence. He is now doing an Executive MBA for working professionals from a premier institute for which he has to take an education loan as the total cost amounts to Rs 36 lakh. He barely manages to save.

If you don’t know where to start, consider the 50/30/20 rule of thumb. Split your income into three categories:

• 50%: Needs, such as rent, school fees for the children, electricity bill, groceries, and so on
• 30%: Wants, which are things or expenses you would like to incur but don't necessarily need to, such as visits to the pub or coffee shop
• 20%: Savings, which are then invested

Use this as a base. Fine tune it to your circumstances.

Additional reading: How can I save for multiple financial goals?

Q 5: Where must you invest?

Investing must make sense for your situation. Creating a portfolio that is consistent with your ability as an investor to take on risk and keeping in mind your time frame, is a complicated exercise.

If you are saving for the near term, then you should avoid equity. Look at debt funds. If it is a long-term goal, you must consider equity. If you are just starting out, you could even consider a Balanced Advantage Fund that invests in equity and debt.

It is important to consider not only risk preference (i.e., how I would feel or react based on market performance), but also risk capacity (i.e., how much risk should I take given my resources and financial situation).

Based on the above, you can arrive at the appropriate asset allocation; how much to invest in equity and fixed-income investments. It would help to take professional advice here.

Don’t ever ignore the opportunity to (legally) save on taxes just because it is a bit of a bother. The less tax you pay, the more disposable income in your hands to either spend or invest. And that should be motivation enough to get rid of your nonchalant attitude towards tax planning.

The investments in Public Provident Fund (PPF), National Savings Certificate (NSC), 5-year fixed deposits with the bank or post office, Equity Linked Savings Schemes (ELSS), Senior Citizen Savings Scheme (SCSS), National Pension Scheme (NPS), and Sukanya Samriddhi (specifically for the girl child) all fall under Section 80C.

Certain expenses also fall under this section. Do cover all in your checklist.

Do not forget that you get a benefit when you pay rent. Also, interest paid on home loans qualify.

Look at Section 80CCC (included under the Section 80C limit), which includes the money spent on the purchase of a new insurance policy or payments made towards renewal or continuation of an existing policy.

Section 80D allows a deduction up to Rs 25,000 for medical insurance premium instalments. The premium should be for you, your spouse, and dependent children.

Finally, tax planning is not something that must be done at the end of the financial year. Now, at the start of the financial year, is the best time to plan and invest.

Please Read

3 things tax planning is NOT

Why you can't compare PPF with ELSS

4 tax-saving assumptions that you are wrong

6 questions to answer when constructing your portfolio and looking at tax planning