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AxisDirect-O-Nomics
Feb 12, 2019 | Source: www.moneycontrol.com
There is no point in concentrating only on the 5% invested in stocks and have 95% invested in traditional investments that do not even beat inflation.
Investors need to go beyond individual stock/fund returns and start focusing on the following metrics to get an idea on the real performance of your overall wealth.
Risk Allocation
How much is invested in different instruments like stocks, bonds, mutual funds, gold, insurance polices, etc. Are you skewed towards one asset class? Generally, most investors tend to have 80-90% in traditional investments like fixed deposits and endowment policies. Calculating your risk allocation will help you know how much of your investments are in risky instruments and if you need to rebalance your portfolio to get better returns. Maybe you can take more risk and are not doing so, simply because you don’t know your risk allocation at an overall portfolio level.
Costs
Have you given a thought to your portfolio costs? There is so much attention given to mutual fund expense ratios and I find everybody trying to go direct, but what about costs which you pay on your insurance policies or on buying gold. Investors try to save 1% on mutual fund investments which may be 10% of their portfolio but do not consider saving the 30% expense which they bear on buying an endowment plan or gold jewelry. You need to calculate the weighted average cost of the portfolio and if you are above 1.5%, you certainly need to reassess your high cost investments as these are eating into your returns.
Returns
There is no point feeling happy about that one investment, where you have a small allocation, which is doing well, when the rest of the investments are growing slowly. Assume a return on 6% p.a. on traditional investments and 10% p.a. on equity, with a 90% allocation to fixed deposits and 10% allocation to equities, the weighted average returns works out to 6.4% p.a. Is this the return you expect from your portfolio? Further post tax, does the portfolio beat inflation? If not, you need to urgently re-adjust your portfolio.
Computing the overall portfolio return, costs and risk allocation is a good start to determine changes to be made to your portfolio to make your money work better for you.
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