In the last post I had explained the 3 portfolio strategy and why it will work far better than the traditional way of mapping a portfolio to each goal and trying to manage asset allocation and re-balancing in each portfolio. Assuming that is what you want to do, how do you go about it? Let me give you some pointers in this post.
Before we get to the specifics of building the 3 portfolios, three fundamental aspects of investing need to be kept in mind. They are – you need to start investing as early as possible, invest as much as you can without compromising the lifestyle you want to lead and invest for as long as possible.
For building the debt portfolio, all that you need to do is focus on your PF and PPF. For any person who will start in a job and continue in it for a length of time, the PF part is kind of automatic. You just need to ensure that you simply continue it without any withdrawal till the end of your working life. If you start with a basic salary of 10000 Rs at 24, have a 10 % increase each year and retire at 60, your PF will amount to 2.32 crores at current rates of interest. Do you need to go for NPS instead of PF? I think not as we will anyway have the MF and stocks portfolio for that.
You need to start a PPF account as soon as you start working and contribute the maximum amount you can in it. Keep it going for extended periods with contribution. 30 years with maximum contribution will get you to 2.1 crores in the end and all this money is tax free. Read these posts on PPF if you need to understand more about it. If you are not in a regular job and therefore do not have PF, then make sure your spouse has a PPF account too. Of course, if she is earning then she should have one anyway.
Once you have taken care of debt, you need to build up your MF portfolio. Read the Guide to MF investing to be clear on how to do this. All your goals in your goal time line should really be met from your MF portfolio. However, if redemption from it seems a bad option when your goal is at hand, due to market situation, use money from your PPF instead to fulfill the goal. You can read about redemption strategy in this post. A personal example may also be of interest.
While you can always invest into stocks from the beginning, my recommendation is that you start doing so in a meaningful manner only after you have taken care of your Debt and MF portfolios such that they are now in an “auto-pilot” mode. Any extra money can go into stocks thereafter. This post will help you get started and you may also find these notes useful.
I will be soon writing a series of posts on stock investing which will cover details on all other facets of investing.
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