By Vishweshwar HS, www.showmytrade.com
Portfolio building means a collection of stocks and other asset classes to meet your financial goals in the longer term. The portfolio should build, which conforms to your best personal investment goals and, importantly, risk tolerance. A well-aligned portfolio is essential for an investor’s “Financial Freedom.”
By following a systematic approach, Investors can construct portfolios which aligned to their investment strategies. Essential steps are:
Ascertaining financial goals is the first task in building a portfolio. The primary significant factor to consider is your age, how much time you have to grow your investments, the amount of capital to invest, and future income needs.
For example, a fresh college graduate just beginning his/her career needs a different investment strategy than a 50-year-old married person expecting to help pay for a child’s college education or marriage and retire in a couple of years.
A second factor to consider is your ability to take the risk. Are you willing to take a chance and ready to lose some money for the possibility of greater returns? Everyone would like to reap high profits year after year. Still, if you can’t take a short-term drop or volatility (prices move very quickly too high to low), it is not worth the stress under such stressed conditions.
It is apparent to note the current situation, future capital needs, and risk tolerance will decide how your investments are allocated among different asset classes.
A conservative investor approaching retirement will focus more on protecting his/her assets and drawing income from these assets in a tax-efficient manner. Assets here can be allocated more to Fixed income (FDs or Bonds), and a minor portion allocated to equity shares.
An aggressive investor can take more risks where he/she won’t have to depend on investment returns can afford to take greater risks for higher returns. Assets here can be allocated more to equity shares and a minor portion allocated to fixed income.
One more way is to take a moderate risk for moderate returns. The objective of a conservative portfolio is to mix fixed income (50%) and high-quality equities (50%).
One has to make a trade-off between risk and return.
Based on different risks and returns, an investor can invest in various assets class — Stocks, Bonds, Mutual Funds, Fixed Deposits, Exchange Traded Funds (ETFs), etc.
Further, we can break down the different asset classes into subclasses, which also have varied risks and potential returns.
For example, an investor can choose:
(1) Direct investment v/s Mutual Funds
(2) Small-cap v/s large-cap stocks
(3) Portfolio diversification (Banks, Industrial stocks, Auto, IT & Pharma, etc.)
(4) Short-term v/s Long-term bonds
(5) Government debt v/s Corporate debt etc.,
Over some time, changes in price movement cause unfavorable risk/reward scenarios. The other factors, like your current financial situation, future needs, and risk tolerance, may change over a period.
Periodically, re-balancing the portfolio is necessary to adjust changing scenarios. The assets allocations are to be analyzed to suit the situation. When re-balancing, it is also essential to consider the tax implication on selling some assets at that point.
For the successful building of portfolios, the First step is to asset allocation for financial goals, duration, and risk tolerance. The second step is to build a portfolio with the right products. The third step is to monitor and rebalance the portfolio for matching your financial goal. One more point to note is risk-adjusted returns to be calculated to see the actual investment picture.
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Good Earning!
