Surplus money should be invested to reap the benefits of compounding over the long term. This is the core principle of wealth creation One should determine goals both short term & long term, invest gradually and diversify your investments.

Contingency funds to be kept as cash at a bank or liquid funds should amount to at least 6 months’ worth of monthly expenses. Contingency fund helps during times of uncertainty and for any emergency like job loss, hospitalisation, or caring for your family. Effective diversification of asset allocation strategy helps to maximize returns with better cost and tax efficiency.

We will break into two parts – Short-term and Long-term investments. One should determine the goals and diversify your investments. The three important factors are time horizon, risk tolerance, and risk versus reward to determine the investment choices.

Short Term

Contingency Fund: A creation of contingency fund for any emergency like job loss, health issues, or caring for your family.

Long Term

Well, the Golden rule of investing is one should invest is (100-minus your age) in equity-related instruments is for better risk-adjusted returns in the long term. An ideal portfolio composition will be as mentioned, and it could vary concerning the risk profile of the investor.

Let us assume a male aged 40 years wants to invest his surplus savings, so 60% of his savings can be attributed to equities related instruments for superior returns beating the inflation.

Equity-related instruments (60%)

Well, equity can be invested through direct investments, PMS, and mutual funds.

Direct Equity/PMS(30%)

One should invest in companies with sound fundamentals, lower debt, consistent profit growth, and generating free cash flows. One should avoid companies that regularly diversify their business into unrelated industries at the cost of their existing profit earned from their core sector.

• Choose a well large research-backed broking house to know more about research-based stock ideas, sector trends on regular basis.

• Determine your risk returns by investing gradually diversifying into various sectors.

• Invest in well-known companies with minimum risk and avoid higher churn

• An ideal portfolio of 10-15 stocks across sectors with a mix of large, midcap, and small caps.

• Track the performance on a half-yearly basis

Mutual Funds (30%)

Systematic investment plans (SIPs) are an excellent way to invest in mutual funds. Lumpsum investing is the second strategy and may prove to be quite useful, especially if you are sure of a strong up move of capital appreciation in the short term.

One should have a mix of mutual funds schemes in the ratio of large-cap, mid-cap, and small-cap schemes.

Debt (25%)

Debt instruments are less volatile than stocks but offer modest but consistent returns. One should invest through the mutual funds, AAA bonds, and G-Secs route. One should keep in mind that certain categories of bonds offer high returns similar to stocks. But these bonds, known as high-yield or junk bonds, also carry higher risk.

Gold (5%)

Well, Gold is a natural hedge against uncertainty, and one can invest through the ETF route or mutual funds.

Cash (10%)

Liquid Funds, Short term bank FD’s, or savings in banks would be an ideal option for an investor and use the proceeds when any need arises.

The author is Chief Business Officer, Reliance Securities

DISCLAIMER: Views expressed are the authors' own, and Outlook Money does not necessarily subscribe to them. Outlook Money shall not be responsible for any damage caused to any person/organisation directly or indirectly.