Investment Portfolio

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21 Aug, 2024

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Investment Portfolio refers to a collection of financial assets, such as stocks, money market instruments, commodities, and bonds. The aim of building such a portfolio is to achieve different financial goals, for example, building a retirement corpus and funding a child’s higher studies.

People can manage their portfolios themselves or hire a fund manager, finance professional, or financial advisor for the same purpose. Having different types of assets within a portfolio helps investors diversify their investments, which mitigates financial risk. Depending on the strategy and underlying assets, such a portfolio can be of various kinds, for example, growth, value, and income.

Investment Portfolio Definition

The investment portfolio meaning refers to multiple financial assets, like money market instruments, stocks, cryptocurrencies, etc., grouped. This portfolio enables organizations as well as individuals to reach their financial goals.
A person must factor in their risk-tolerance capacity, investment objective, and duration of investment when building their ideal investment portfolio. Moreover, they must try to minimize their investment turnover.
Individuals can improve their portfolio’s performance by reviewing and rebalancing it at fixed intervals.
Investors can hire financial advisors or a fund manager to build and manage their investment portfolio if they lack the knowledge

Investment Portfolio Explained

The investment portfolio meaning refers to a group of financial investments, which may include bonds, debentures, stocks, cryptocurrencies, mutual fund units, etc. The purpose of constructing such a portfolio is to achieve a number of predetermined financial goals. The components of an investment portfolio depend on multiple factors, for example, the investment objective, investment time horizon, and investor’s risk appetite.

Without such a portfolio, investors might not have the necessary preparation for multiple crucial milestones in life. A diversified portfolio with a prudent mix of financial assets helps individuals safeguard their capital. Moreover, it assists them in earning desirable returns. This portfolio may also help people earn regular income, which can be extremely helpful for retired or non-salaried individuals.

Types

The different types of portfolios in the investment world are as follows:

Income - Income portfolios focus on generating regular income for investors instead of making capital gains. Investors building such a portfolio invest in stocks with high dividend yields and fixed-income instruments, like bonds, debentures, and more.
Value - Building such a portfolio focuses on investing in cheap assets in terms of valuation. Such securities can be extremely useful for investors during challenging times when a lot of organizations struggle to remain afloat. A value portfolio includes stocks that have profit potential but are priced at a level below their fair value in the market, per analysis.
Growth - As the name suggests, the primary objective of this kind of portfolio is capital appreciation. The achievement of the same happens by undertaking more significant risks. In other words, such portfolios generally come with high potential rewards and a high degree of financial risk. They primarily include stocks of young companies as they can deliver significantly more growth than well-established companies.
Hybrid - A hybrid portfolio consists of multiple asset classes, which ensure diversification. In other words, this type of portfolio may include stocks, debt securities, gold, real estate, and even cryptocurrencies. Depending on the financial goals and strategy of an investor, the percentage of investment in different asset classes varies. For example, an aggressive investor may primarily include equity in the portfolio.
Speculative - This type of portfolio carries the highest degree of financial risk as it primarily includes investments in highly risky financial instruments with a very high potential rate of return. Such a portfolio may include investments in new digital assets, shares of newly listed companies creating a lot of buzz on the Internet, etc.

How To Build?

Investors can follow these steps to build an ideal investment portfolio that is in line with their financial goals:

The first step is to figure out the portfolio’s objective. Determining the goal is vital to deciding what type of investments is necessary.
Select investments that align with your investment objective and risk appetite. For example, conservative investors looking to earn higher returns than savings account deposits can invest in different debt securities, like bonds and debentures.
Next, individuals or organizations must reduce investment turnover. This is because transaction costs negatively impact portfolio returns. One must remember that some investments may take time to deliver the expected performance.
Avoid paying too much for any asset.
Lastly, people must make sure not to depend only on one investment. Diversification of investment portfolios is crucial to lower the overall risk and maximize the chances of achieving the set financial goals.

How To Diversify?

Let us look at different ways for one to diversify their portfolio.

Spread the entire wealth across multiple stocks and sectors. Also, consider allocating funds to different real estate investment trusts or REITs and exchange-traded funds or ETFs.
Consider investing in index and bond funds. Allocating funds to financial instruments tracking different indices can be a prudent long-term investment for diversification. Since such funds replicate bond indices’ performance, they aim to reflect the value of the bond market. Also, since index funds have a passive management strategy, they charge a low expense ratio, which means more returns for investors.
Individuals and organizations must keep building their portfolios by adding securities to them regularly. Moreover, they can invest in real estate and different commodities, like gold, to ensure optimal portfolio diversification.
Investors can diversify their portfolios on the basis of equity themes. For example, if rural demand becomes a popular theme, they can consider investing in shares of tractor manufacturing companies, agrochemical producers, and fertilizer manufacturers.

Also, when investing in different securities for diversification, they must carry out a thorough analysis, which may include conducting a fundamental analysis of stocks, reviewing credit ratings of fixed-income securities, etc.

How To Manage?

One can follow these steps to manage their portfolio efficiently:

Keep the portfolio goal-focused and buy and sell the financial assets, keeping in mind their risk appetite and budget.
Make sure to diversify the portfolio by investing in different asset classes and sub-classes.
Regularly monitor the portfolio performance to identify what adjustments are necessary according to the market scenario.
Rebalance the portfolio from time to time if there is a deviation from the target return percentage.

Examples

Let us look at a few investment portfolio examples to understand the concept better.

Example #1

Suppose Sam is a 25-year-old salaried individual who only invested in stocks in the technology sector. After investing for a period of 3 years, he realized that he was struggling to generate financial gains from the stock market owing to the unfavorable economic environment. To reduce the losses and boost the overall returns, he decided to diversify his investment portfolio by allocating funds across two more asset classes — debt and commodity. Moreover, he invested in stocks across multiple sectors of the economy.

After making these adjustments, Sam’s portfolio returns jumped significantly, and he was able to fulfill his goal of purchasing a new house.

Example #2

At the end of 2023, the investment portfolio of the Export Development Bank of Egypt or EBank, reached Egyptian Pound (EGP) 55 billion or $1.78 billion, according to Ahmed Galal, the chairman of the financial institution. He added that in the same year, the organization’s profit jumped to EGP 3.4 billion, which is a significant surge considering the profit reported in 2022 was EGP 1.34 billion.

As announced by Galal, the company will open 3-5 new branches while working on digital expansion at the same time, and with its improved financial performance, it looks well-placed to execute the plan successfully.

How To Improve?

One can take the following measures to improve their portfolio of investments:

Focus on portfolio diversification to mitigate the financial risk associated and improve the chances of maximizing returns. This strategy works because usually, if certain asset classes are delivering poor performance, simultaneously, other asset classes in the portfolio perform well.
Allocate funds to shares of companies in specific that have the potential to offer significant growth. Note that one can offset the associated risk in this case by opting for longer holding periods.
Investors can consider planning portfolios in post-tax terms. Tax-efficient portfolio management helps investors in maximizing their financial gains while minimizing taxes. In other words, this will help an investor optimize their after-tax returns.
Investors can utilize the dollar-cost averaging or DCA approach, which involves investing a sum at fixed intervals to purchase specific securities. Investors mostly use the same concept when allocating funds to mutual funds.
Review and rebalance the portfolio periodically to optimize the portfolio’s performance per the economic environment and market scenario.

Frequently Asked Questions (FAQs)

What percentage of your investment portfolio should be in stocks?

There is no one-size-fits-all solution in this case. One must allocate their available funds to equity primarily based on three crucial factors — risk profile, investment objective, and investment duration. For example, if retired persons seeking stable income are building a portfolio, their equity percentage will be different from an individual looking to achieve maximum growth over a short period.

How to do investment portfolio analysis?

Typically, the steps involved in investment portfolio analysis are as follows:

- First, analyze the performance of the portfolio to determine how well it performed over a certain duration.
- Evaluate the portfolio risk by gauging the possibility of financial losses or future fluctuations.
- Carry out a risk-return analysis to understand how the potential returns of the portfolio compare to the associated inherent risks.
- Consider other important factors, like the dividend yield of the portfolio, if applicable.

Should I check my investment portfolio every day?

There is no need to check a portfolio every day as it may lead to impulsive decisions and emotional investing. One may buy or sell assets purely based on market fluctuations, which can result in underperformance over the long term.