INVESTMENT: How to make your portfolio effective

The objective of managing an investment portfolio effectively is to optimise between returns and risk. Minimising risk helps in reducing the volatility of the investment journey, thereby, enhancing the probability of making money.

Minimising risk has to be achieved at various levels:

(a) Investing the appropriate quantum of money (based on one’s goals) in different asset classes: Most popular asset classes would be fixed income, equity, gold, and real estate. Gold is a hedge against inflation, real estate has long cycles, is largely indivisible and may not be liquid for months or years at a stretch. Fixed income assets offer returns similar to inflation and are relatively low in volatility. Equities beat inflation over long term, but are could be volatile over medium to a short period of time.

Investors need to to know the tenure of the goal, along with their risk capacity, risk tolerance and the required risk.

The tenure of goals could be short term (less than two years), medium term (between two to seven years and long term (in excess of seven years). For short-term goals, liquid, ultra-short-term and short-term MFs, short-term FDs and savings account would make sense. For medium-term goals, options such as three to five years FDs, corporate bond, income and banking and PSU based MFs are relevant. For long-term goals, direct stocks, diversified equity MFs or portfolio management services could be pertinent.

Risk capacity is the ability to take risk-can you afford to take it? Risk tolerance refers to the willingness to take risk – are you mentally prepared to bear the risk? Required risk refers to the necessity of taking the risk. Taking a risk at times can be imperative to achieving one’s goals.

(b) Spreading money in each asset class, around various fund managers, offers different flavours of fund management, depending on the manager(s) interpretations, reading of what lies ahead, securities selection, their proportion in a portfolio and various times, points and extent of entry/exit.

(c) Investing across assets refers to the investment basket being government securities, central government bonds, state government bonds, corporate bonds, PSU bonds, treasury bills, etc, for fixed-income assets and could mean large-cap, mid-cap, multi-cap, small-cap (or a combination of these), thematic or sector specific funds/ portfolio for equities.

(d) Investing as per different styles of investing would mean low risk (liquid securities or FDs), medium risk (corporate bonds), high risk like dynamic bond funds, credit risk funds, government security funds or non-convertible debentures of poorly rated issuers, for fixed income products. For equity it would refer to value (undervalued and sustainable story ahead), growth (fairly valued with a sustainable growth ahead), blend (combination of growth and value) or contrarian (purchasing and selling in contrast to the prevailing sentiment of the time). Active or passive would depend upon whether holdings are following an index or the portfolio is being actively chosen and built.

(e) Investing across various points of time would apply to volatile asset classes like equity or fixed-income assets like credit risk and government securities. The attempt is towards containing volatility by averaging out points of entry. This can be done through investing systematically or switching between volatile and non-volatile asset classes, regularly.