Portfolio : A collection of investments owned by the same individual or organization.
Will : legal declaration of how a person wish his/her possession to be disposed after their death
Return : Profit or loss derived from an investment
Investor : An investor is any party that makes an investment.
A set of assets which an investor holds. This may contain equities, mutual funds, insurance and other cash equivalents.
A disciplined approach towards building an investment portfolio is in itself a very good investment for the investor.
Investors aim to achieve their financial goals through their investments and these goals vary widely across the investor community. There are different types of investors who belong to different age brackets, have contrasting , and have a plethora of different preferences for which they need money during their lifetime. These factors and motives decide the investment pattern and the portfolio which needs to be built.
Here are four small steps to build an effective investment portfolio which will help the investor achieve their dream run as far as investment yields are concerned:
I. Get the right Asset Allocation for your needs
The combination of current financial situation, investment goals and the risk taking propensity decide how the different investments would be divided among the asset classes. Higher returns are achievable by undertaking greater risks. This is referred to as risk/return trade off.
The 21 year old would obviously be in no great hurry to see his investment yield a return immediately and would thus be prepared to take greater risk in comparison to the 55 year old investor who would probably look at good risk-free returns which are also tax-efficient, after his retirement.
In this context it is relevant to discuss different portfolio which range from the conservative to the aggressive.
• An aggressive portfolio will consist of around 70 to 75 % of equities and the balance in bonds and fixed income securities.
• A moderately aggressive portfolio will be made up of 50 to 55 % in equities, Up to 40 % in bonds and fixed income securities and the rest in cash and equivalents.
• As compared to this a conservative portfolio would not stake more than 20 % in equities and the bulk of investments would be in fixed income securities.
II. Achieving the defined portfolio
Once the asset allocation has been fixed the amount has to be allocated appropriately into asset classes. However there are some sub-categorizations of the asset classes which the investor might want to get familiar with. The equities offer an opportunity for investment in different sectors, market caps, domestic and foreign equities in the same way as bonds which can be allocated between short term and long term, government versus corporate debt and so on.
The basket of investments consists of stocks, bonds, Mutual funds and Exchange-Traded Funds (EFTs). The investor can choose from these basic categories and their numerous variants available in the market which best suit their individual investment needs.
Before picking a stock and/or a bond it is imperative that their inherent traits are examined thoroughly. Short-listing potential picks and carrying out further study on them is always a good practice. Similar exercise needs to be carried out for Mutual Funds and ETFs’ also.
III. Reassessing the Portfolio Mix
Nothing in this world is permanently permanent and so it is with the portfolio of investments. Market movements, change in priorities, needs and current financial situations, guides the portfolio mix.
In order to carry out a well designed re-balancing exercise it is necessary to find out which portions or asset classes are overweight and which are underweight. Pruning the overweight ones and allocating them to the underweight class will set it right for the time.
IV. Rebalancing Strategically
While carrying out the rebalancing exercise as mentioned in step III, it is helpful to keep in mind certain things which have an effect on the investment portfolio.
A particular equity in the portfolio may be doing well, however as a part of the rebalancing exercise it may become necessary to sell the equity and this may attract substantial capital gains tax. In such a situation it would be better to carry out the rebalancing in a different manner, perhaps by contributing more in the non-equity components, thereby bringing down the ratio.
The investor needs to be well informed and conversant about the market interactions on a regular basis. Analysis and feedback from the market is essential to keep stability to the portfolio. In the above example it might be so that the equity market is expected to crash heavily and in such a case it is always advisable to sell inspite of the tax implications involved.
A well diversified portfolio is the key for a sustained and healthy long-term growth of the investments. An ideal portfolio is one which will stand the test of time and will be consistent in returns and solid in growth. The small steps recommended will result in your investments to leap.
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