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Building a portfolio is a complex exercise, and its maintenance has to be regular. A person’s portfolio holds different types of assets based on her financial goals, and each asset class gives different types of returns, which is why a portfolio must have an ideal mix of financial products. Too much equity may expose you to undue risk, while being too conservative and investing only in, say, fixed deposits can mean that you are not able to build the corpus that you need. Investment decisions must be taken based on factors such as an individual’s goals, time horizon and risk appetite. Apart from these, one must also keep in mind the volatility risk of the asset class, liquidity, lock-in rules and taxation. What suits one person may not suit another person. In fact, in the scramble to get the highest returns, many people lose sight of their goals. Read more about it here.
A portfolio also needs to be diversified and it has to hold a variety of investments so that all returns do not move in the same direction in different market conditions. This way if the returns of one type of asset fall, the portfolio is cushioned by a rise in another, which protects the overall portfolio returns. For effective diversification, one has to see how the returns from each product respond to risk factors and how these assets fit in with your financial goals and investment horizon. Read more about this here.
Let’s take a look at how four commonly used asset types—equity, cash, gold and fixed income—have done in different periods. Equity clearly seems to have an edge over other asset classes as it has given returns of 14.01% over a one-year period. It also is a clear winner when it comes to three-year and five-year returns as it has beaten other asset classes by a considerable margin.