Manage your portfolio by diversification

How to plan and manage one's finances is very important. It is a fact that even among well-educated people, lack of financial literacy is relatively on the higher side. The primary goal of financial planning vary from individuals but generally for purchase of a house/flat, children education/ marriage, meeting contingencies, retirement planning etc. The time horizon also varies from short-term to long-term. To achieve the primary goal of investment, one has to start early investments, at regular intervals, and a reasonably fair amount based on the capacity to save and invest.

Return, safety, and liquidity are the most important factors one has to keep in mind while constructing an investment portfolio. This is popularly known as the ‘Magic triangle of investment’. Generally speaking, return is inversely related to safety and liquidity.

Investment strategy and diversification

Diversification is a sound principle of Investment. It is akin to the old saying, “Don’t put all of your eggs in one basket.” The role of diversification of assets while building an investment portfolio cannot be overemphasized. The purpose of portfolio diversification is to derive a better risk adjusted return that than of a single asset class. Various assets class include risk-free investments like Government Securities, deposits with Banks and Financial institutions, FDs of Joint stock companies, Corporate Bonds and debentures, Stock markets, Mutual funds, Insurance, Commodities including Gold, real estate, crypto etc. The rate of return, level of safety of investment and how fast the asset can be converted into cash should an exigency arises without loss of value etc. vary from assets to assets. Therefore building a suitable portfolio with a judicious mix of different classes of assets at right proportion is very critical for achieving the primary goal of financial planning.

Types of investors

Though there are various types of investors, for better understanding, investors can be broadly classified into three categories. This classification is done based on the risk appetite, growth prospects, time horizon and liquidity needs.

Aggressive: Suitable for youngsters and those newly started earning. This group aim a rapid growth and high returns on their portfolio As such the risk tolerance will be higher. Often invest in fast-growing companies and new geographical markets and industries. Their focus will be on emerging markets and speculative ventures with a rapid growth and high returns. The time horizon will be longer, allowing for recovery from market volatility.

An investment basket with an asset allocation of say 75% -80% in equities, particularly large caps and fast-growing high beta stocks , 10-15% in long-dated debt securities, and say 10% in commodities and real estates can be termed as an aggressive investor.

Conservative: Ideal for investors above the age of 50 and pensioners and those who focus on steady and reliable income. They are risk averse. They heavily depend on regular and fixed cash flows to meet their routine requirements. They may also need quick cash to meet. Unforeseen expenses. The primary goal of this group is stability and preservation of wealth.

The class of investments include short and medium term government securities, Bank Deposits, top-rated corporate bonds and corporate FDs, and stocks of lower beta blue-chip companies, gold, ETF etc. In short a dynamic portfolio is required which will adjust the portfolio weights based on market conditions.

Moderate Investors: This group aims at a balanced strategy. A hybrid of aggressiveness and conservatism. The risk appetite is moderate and they opt for a combination of debt and high-performing equity. The overall return on the portfolio averages and can be consistent even in adverse times. This group of investors prioritizes capital preservation and growth.

Typically the portfolio consists of 60% in equity or equity oriented funds and 40% in debt or fixed income securities. This is ideal for long term goals with managed risks.

Construction of portfolio

How to construct an ideal portfolio is million-dollar question. Often the investors are confused in this matter. Again the mix of the portfolio among different class of assets viz fixed-income, equity and equity-oriented stocks and commodities, real estate etc to be decided. This depends on the objectives of investment keeping in mind the risk tolerance and liquidity requirements. In the absence of a fair understanding of financial planning, it is better to seek the advice of an experienced and qualified financial advisor or wealth manager.

Managing the portfolio is not an easy task. A periodical review of the performance of the asset to be conducted and churning is to be done wherever required. Therefore one need to feel confident in the competency of his financial planner who can deliver your goal efficiently. It is nevertheless to say that like any other professional, financial planner also charges a fees for their services.

t is justified if the portfolio is giving a better than expected growth and return. It is to be remembered that building a diversified portfolio can be easier in theory than in practice.