Advantages and Types of Investment Portfolios
This Article Includes
- What is an Investment Portfolio?
- Types of Investment Portfolios
- What are the Components of Portfolio Investment?
- Advantages of Portfolio Investment
“Don’t keep all your eggs in one basket” is an age-old adage that holds in most strata of our lives. And when it comes to your investment endeavors, it would be dangerous to invest all your funds in a single asset, say real estate, fixed deposit, or any other. It is why most investment experts suggest focusing on an investment portfolio, be it a stock market portfolio or other instruments. This article discusses the advantages of portfolio investment.
What is an Investment Portfolio?
An investment portfolio is an assortment of investable assets like stocks, bonds, cryptocurrencies, and more. These are divided into a proportion that caters to the investor’s risk propensity. It is a virtual basket that considers the following:
- Your investment goals
- Your risk profile
- When do you want to encash the amount invested?
Types of Investment Portfolios
Portfolio investment comes in several forms and types:
- Growth portfolio
The reason behind creating such a portfolio is to grow your capital at a significant pace. It comes with taking higher risks while investing in companies and instruments that are beginning to grow and have a considerable upside. A substantial portion of funds in the growth portfolio goes towards young financial instruments that can possibly turn into multi-baggers in the future.
- Value portfolio
Here, the focus is to find and invest in undervalued instruments. It means that the investor focuses on figuring out the asset’s intrinsic value and buying only those trading around what they are worth. As a result, these investment portfolios come with lower risks and perform well in a bearish market. While the returns may not be as high as growth portfolios, these ensure continual growth to the investor.
- Income portfolio
Income portfolios are a substitute to pension funds and similar funds that offer a periodic payout to the investors. Here, the focus is on investing in assets with a proven dividend record instead of mere capital appreciation. These ensure regular passive income to the investor while being comparatively risk-free.
What are the Components of Portfolio Investment?
Today, there are myriad investment instruments available at an investor’s disposal. Each of these asset classes come with their set of characteristics and risk factors. For example, a debt portfolio has low-risk assets but entails limited returns, whereas a stock market portfolio carries a higher risk and return perspective comprising shares of several companies.
Here are some of the asset classes that comprise an individual’s portfolio investment endeavor:
- ETFs (Exchange-traded funds)
- Mutual funds
- REITs (Real estate investment trusts)
The investor invests in a mix of these depending on several factors, such as risk propensity, investment tenure, comfort, and more.
Advantages of Portfolio Investment
The advantages of portfolio management are multi-faceted, especially if you are undertaking a long-term investment approach. Investing in the traditional world was more about parking most of your funds in a handful of asset classes with similar characteristics. For example, our previous generation was obsessed with fixed deposits.
Thankfully, with portfolio investment coming at the forefront, things have started taking a different turn. Here are its advantages:
- Risk mitigation
The basic idea of creating a portfolio is to reduce risk while averaging potential returns. It means that while in some years the average returns of individual assets you would have otherwise invested in would be higher, your portfolio would offer robust resistance during difficult times and offer steady returns.
A well-thought-out investment portfolio consists of a plethora of asset classes unrelated or negatively related to each other. For example, if someone has an equity-heavy portfolio, having a small percentage of gold would cater well to mitigate their risk. The importance of portfolio diversification lies in its ability to combat volatility with ease.
- Systematic approach
The basic criterion for the best investment portfolio is to have a systematic approach throughout. For example, if you are a value investor, you should not invest in growth-based companies all of a sudden without understanding the repercussions. An investment portfolio is created and regularly assessed to keep the risk factor in check and also the performance of the assets it encompasses.
- Higher immunity to external crisis
In most cases, managers do not tinker much with the investment portfolio once created. While they look to rebalance every few months, there is a slight chance of massive upheavals. Most of the time, you will find the weights of different asset classes tweaked to ensure optimum returns for the investor. It is because the assets are carefully chosen to counter external risks and stand the test of time.
- Great for capital building or passive income
No one can guarantee that an asset will generate an X% return every year starting tomorrow. While it is easier for debts, it is improbable for equity. So investors must bet on more than one quality asset to ensure the final product meets their earnings expectations, be it capital appreciation or periodic dividend payout.
Create a Robust Investment Portfolio with WealthDesk
Building a portfolio for long-term investment is no rocket science. Still, most people falter at factoring in the requisite risk factors and rebalancing whenever the need is. So, it is often a good decision to take the help of a professional expert. WealthDesk has a set of registered SEBI professionals to assist investors through their own curated portfolios.
At WealthDesk, we provide access to professionals who follow a research-driven approach. The focus is on understanding the risk propensity of each investor and creating a basket that would best suit their needs. In addition, investors have the option to subscribe to premium portfolios called WealthBaskets that are curated on the basis of specific investment style and investor’s risk profile.
Financial instruments come with their risk factors. So, it is not a feasible idea to have all your funds parked in a single space. Portfolio investment is a way forward to optimize risk and reward for your investment endeavors.
A good investment portfolio optimizes the potential returns while matching the customer’s risk profile. For example, let us consider an investor who has a medium risk profile. In such a case, the portfolio could have a balance of blue-chip stocks and debt funds for maximum impact.
We do not have a time machine to guarantee the future performance of an asset. So it is always wise to bifurcate our funds in a myriad of assets to protect your capital while ensuring steady growth even during difficult times.
A stock portfolio is a basket of equity stocks. A good stock portfolio could have around 20 to 30 companies that investors believe would give them good returns. The selection of such companies is often based on the risk profile and growth expectations of the investor.
In most cases, the instruments chosen for a portfolio are to help reduce the risk quotient to the minimum. So it is unlikely that your risk factor will increase if you build a portfolio.