Savings and investments are key strategies for buil- ding wealth. There are various investment opti- ons and savings plans available that can help you manage your finances effectively and strategi- cally.

One investment strategy is the 5% rule, which advises not to put more than 5% of your portfolio in any single investment. This rule helps create a balan- ced portfolio, which is particularly important when you have investments linked to market fluctuations rather than fixed income. By following this rule, a loss in one investment won't significantly impact your entire portfolio, making it a safer and more strategic approach to investing and saving.

This savings plan focuses on minimizing risk while maximizing potential returns. By spreading your investments across various options, you ensure that your financial health isn't tied to the success or failure of a single asset. This approach not only preserves your capital but also provides room for your investments to grow over time.

How do you implement the 5% plan in your savings plan?

The crux of the 5% plan is that no particular investment in your portfolio should exceed 5% of the total invested amount.

This is simply because if we add weights to a particular investment option, then the amount of returns a single investment can provide will be higher. However, if it is a highly risky asset class and it sees a negative return, the impact can be tremendous on your entire portfolio.

To diversify and soften the blow of such risks, savings plans and investments require you to implement the 5% plan into your portfolio.

Coming to the implementation of such a rule into your portfolio:

• Consider the instruments in your portfolio. Check out the amount you have invested in each of those amounts. Now enlist them in a spreadsheet and add weights by comparing it to your total invested amount. For eg. If you have invested ₹10 lakhs and you have ₹3 lakhs in mutual funds, then the weight it carries is 30% of your portfolio.
• In such a case, diversifying the categories of your mutual funds is better. Some of your plans can be toward tax saving, some can be low-risk debt funds, and others can be bluechip or mid-cap funds that carry some additional risk.
• The rule of 5% says that if your mutual fund portfolio has only 1 fund, it carries 30% weight in your portfolio. Any change can positively or negatively impact your savings plan and affect your wealth creation goals.

What makes a good portfolio?

A good savings plan and investment plan are geared towards how much you can afford in terms of risk and how you invest. Being disciplined can help you create wealth. If you incorporate the 5% savings plan in your portfolio, your portfolio will help you mitigate risks better. It will help you earn your returns and avoid wealth erosion, too. Check if your portfolio is hedged against risk today.

In conclusion, the 5% rule is a simple yet effective way to safeguard your investments and manage risks. It's about being smart with where you place your money and ensuring that no single investment can make or break your financial future. As you continue to build your portfolio, keep this rule in mind to stay balanced and secure. It’s a practical step towards a more stable and successful financial journey.