What Should You Keep In Mind While Building an Investment Portfolio?| North Loop Official Blog
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20 Oct 2020

What Should You Keep In Mind While Building an Investment Portfolio?

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Introduction-

One of the first steps towards starting a successful investment journey is to build a well-rounded investment portfolio that aligns with your financial goals and risk tolerance. In this article, we will take you through the different types of investment portfolio as well as the various factors to be considered when building a robust one that matches your financial objectives. Before we begin, let us take a look at investment portfolio meaning and its examples.

Investment portfolio meaning -

An investment portfolio is a collection of assets that you invest in that includes mutual funds, stocks, bonds, securities, gold and exchange-traded funds.

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Investment portfolio types -

The four popular investment portfolio types are as follows -

The Aggressive Portfolio -An aggressive portfolio usually consists of stocks with a high beta or sensitivity to the overall market. That means if you invest in a stock with a beta value three, it will move thrice as much as the overall market in either direction. If you are looking for an aggressive portfolio, it is advisable to go for companies in their early stages of growth that offer a unique value proposition. Even companies that have rapidly increased earnings growth are a good proposition for this kind of portfolio. However, the key to success in such investing is to keep losses to a minimum and adopt efficient risk management techniques.

The Defensive Portfolio -A defensive portfolio consists of investments that are not sensitive to market movements and give stable or fixed returns. Most of those present in this type of portfolio do well in both good and bad times. A defensive portfolio is a prudent choice if you have a low-risk tolerance and want secure returns.

The Income Portfolio -An income portfolio focuses on investments that generate positive cash flow. REITs or Real Estate Investment Trusts are a favourable example of an income portfolio. You can go for these if you want to make money from dividends or get other types of distributions that get meant for stakeholders. It can also become a good source of retirement income.

The Hybrid Portfolio -A hybrid portfolio consists of a variety of investments such as bonds, commodities, real estate etc. The approach for this type of portfolio is to diversify across multiple asset classes and mix stocks as well as bonds in relatively equal proportions. If you do not want to invest in high-risk equities alone, a hybrid portfolio can be a good option as it offers benefits of both fixed income securities as well as equities.

Investment Portfolio Examples -

Investment Portfolio examples include the following -

Risk-free portfolios - These primarily have investment securities like treasury bonds where the risk is almost nil, but the returns are also lower compared to other portfolios.

Low-risk portfolios - These portfolios consist of majorly risk-free assets combined with some risk-based securities to provide a mix of low-risk investments with decent returns.

Medium-risk portfolios - These have more risk-free securities than the high-risk portfolio but lesser risk-based assets.

High-risk portfolios - These include a lot of high-risk securities accompanied with higher returns.

Top things to keep in mind while building an investment portfolio -

Investment horizon - The investments you make should match with your investment horizon. That means if you have a long-term horizon of more than five years, you can invest in assets like equities. For a short-term investment horizon, more stable and liquid investments would be a better choice.

Risk tolerance - The next thing to keep in mind is your risk tolerance. That means you need to ascertain whether you want to play it safe and earn a fixed rate of income, or you want to be a risk-taker. The best way to assess this is by considering several factors like your liquidity requirements, nature of income, number of dependents you have etc. If you are looking for high return investments and have a reasonably high risk-appetite, you can opt for stocks or equity mutual funds that give inflation-beating returns in the long run but are subject to market risks. However, if you want to avoid risks and play it safe, you can consider investing in fixed deposits or debt instruments that come with moderate returns at a relatively lesser risk. (If you invest in fixed deposits with a digital banking platform like North Loop, you can earn considerably higher returns at an interest rate of 7.50%). Debt mutual funds also get considered safer than equities or equity mutual funds because they carry a guaranteed rate of return.

Diversification - Diversification is important because it allows you to spread your risk across different sectors, industries or geographic regions. That means if let us say, something negative happens to affect industries in a particular zone, its impact will only hit a segment of your portfolio. While you will still feel the effect of the disaster, it will not be as intense as you would have if you didn't diversify your portfolio.

Investment Portfolio for 30-year-old Indian (as suggested by experts) -

That depends on a variety of factors and varies for every individual. Since there is no stipulated or correct combination, it is best to identify personal needs, requirements and goals to determine the perfect mix for an investment portfolio. However, a general idea of portfolio weightage as suggested by experts is as follows -

   
Investments   
   
Portfolio Weightage   
   
Equity   
   
60%   
   
Bonds   
   
10%   
   
Mutual funds   
   
20%   
   
Other investments   
   
10%   

Investment Portfolio for young adults (as suggested by experts) -

The basic principle behind age-based asset allocation is that your exposure to portfolio risk should ideally reduce with age. That is the reason most experts suggest that, if your current age is let us say 25 years, your portfolio may get composed of around 75% equity funds and the balance with debt funds and cash. That way, when you reach 45 years, you can switch to invest in 65% of funds in equity and rest in debt. Similarly, as you approach retirement age, you can initiate a systematic transfer plan to move your instruments gradually from equity funds to liquid funds.

Conclusion -

Building an ideal investment portfolio that suits your needs can get tricky. That is why it is best to assess your requirements well and research about the various investment options and the risks associated with them before making a decision.

If you want to invest in mutual funds, fixed deposits or stocks, you can sign up with North Loop. We offer an easy investing platform with no hidden fees or charges. Click here to sign up.

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This publication is provided for general information purposes only and is not intended to cover every aspect of the topics with which it deals. It is not intended be advice. You must obtain professional advice before taking, or refraining from, any action on the basis of the content in this publication. The information in this publication does not constitute legal, tax, investment or other professional advice from North Loop or its affiliates. We make no representations, warranties or guarantees, whether express or implied, that the content in the publication is accurate, complete or up to date. All opinions expressed do not reflect the views of North Loop nor are endorsed by North Loop.