What Are Model Portfolios? A Financial Planner Tool

Introduction

In financial planning, one-size-fits-all approaches rarely work. Every investor has unique goals, risk tolerance, and an investment horizon. This means a single portfolio won’t suit all investors.

This is where model portfolios come in. Financial planners use these portfolios to customize investments based on different investor profiles, ensuring the asset allocation fits each client’s risk tolerance and financial situation.

In this article, we’ll explain what model portfolios are, how they’re structured, and how they help financial planners create personalized investment strategies.

What Are Model Portfolios?

A model portfolio is a pre-designed asset allocation template used by financial planners. It helps investors achieve their financial goals by customizing the mix of assets based on risk appetite and investment time horizon.

Model portfolios typically include various asset classes such as:

• Equity funds

• Debt funds

• Gold ETFs

• Gilt funds

• Liquid funds

For example:

• A young professional with a high-risk tolerance may have a model portfolio focused mainly on equities.

• A retiree may have a more conservative portfolio, with more funds in debt and gilt funds.

Examples of Model Portfolios

Financial planners use model portfolios for various life stages and financial profiles. Here are some examples:

1. Young Call Centre/BPO Employee with No Dependents

• 50% Diversified Equity Schemes (preferably via SIP)

• 20% Sector Funds

• 10% Gold ETF

• 10% Diversified Debt Fund

• 10% Liquid Schemes

This portfolio suits someone starting their career with a high-risk appetite and a long investment horizon. Equities form the majority of the portfolio to offer higher returns over time.

2. Young Married Single-Income Family with Two School-Going Kids

• 35% Diversified Equity Schemes

• 10% Sector Funds

• 15% Gold ETF

• 30% Diversified Debt Fund

• 10% Liquid Schemes

This portfolio balances growth and safety. It has a significant portion in debt funds for stability, while still investing in equities for long-term growth. Gold acts as a hedge against inflation.

3. Single-Income Family with Grown-Up Children Who Are Yet to Settle Down

• 35% Diversified Equity Schemes

• 15% Gold ETF

• 15% Gilt Fund

• 15% Diversified Debt Fund

• 20% Liquid Schemes

This investor focuses on wealth preservation, with a growth component through equities and gold. Gilt funds and debt funds provide stability and safety.

4. Couple in Their Seventies, With No Immediate Family Support

• 15% Diversified Equity Index Scheme

• 10% Gold ETF

• 30% Gilt Fund

• 30% Diversified Debt Fund

• 15% Liquid Schemes

For retirees, the priority is capital preservation and generating steady income. This portfolio is more conservative, with more funds allocated to gilt and debt funds.

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Customizing Model Portfolios

The percentages in these portfolios are illustrative. They should be adjusted based on individual circumstances. For example, a couple in their seventies with no family support and a large investible corpus may opt for a more aggressive portfolio.

Example of a Customized Portfolio for a Retired Couple:

• 20% Diversified Equity Scheme

• 10% Diversified Equity Index Scheme

• 10% Gold ETF

• 25% Gilt Fund

• 25% Diversified Debt Fund

• 10% Liquid Schemes

This portfolio is more balanced. It includes equities for growth while keeping a solid focus on safe investments like gilt funds and debt funds.

The Importance of Model Portfolios in Financial Planning

Model portfolios are a valuable tool for financial planners. They help create personalized investment strategies that align with a client’s unique financial circumstances.

Model portfolios are flexible and can be tweaked based on goals, risk tolerance, and time horizons.

Conclusion

The essence of financial planning is to create an investment strategy that matches an individual’s goals, risk tolerance, and life stage. Model portfolios help financial planners build diversified, risk-adjusted investment solutions tailored to each client’s needs.

Before meeting your financial planner, ask about the model portfolios available and how they can be customized to suit your financial goals.

Disclaimer

This article is for educational purposes only and should not be considered as financial advice. Always consult with a certified financial planner to create a personalized investment strategy based on your individual needs.