A guide to building the ideal investment portfolio for your risk appetite

An investment portfolio contains all the assets you own as an investor. The portfolio could include stocks, cash, commodities and mutual funds, among others. An ideal investment portfolio should have a good mix of asset classes in order to maintain a balance.

A mutual fund is one kind of investment in your portfolio. It is a combination or a portfolio of stocks, bonds or other assets and ensures asset allocation when you invest in a fund. Your portfolio management is done by a manager who invests in assets based on the nature of the fund and its goal. You can pick a fund based on your risk profile. There are equity mutual funds, debt mutual funds and hybrid funds, among a whole range of fund varieties you can pick, based on your risk profile or appetite. You would need to have a demat account before you go about picking the best mutual funds to invest in.

However, an investment portfolio need not be about mutual funds alone. You could have a bouquet of individual stocks, gold, real estate investments and commodities in your portfolio, apart from mutual funds. For assets such as stocks, commodities or gold funds, you would need a trading and demat account.

Assess your risk appetite

Before you build an investment portfolio, you would need to assess your risk profile or appetite. Essentially, this is an assessment of how much you are willing to or can invest, and how much you can afford to lose and not be too affected by the loss at times when the markets are volatile. Do you have the risk tolerance for volatility or would you rather play it safe and stay low-risk or risk-free? These are questions you would need to ask yourself before you start building your investment portfolio. Your risk appetite depends on several factors including your age, financial commitments, income and investment goals.

Identify your goals

Identifying your investment goals is a key aspect of portfolio management. Knowing the answer to why you are investing, what the purpose of investment is, holds the key to picking the best mutual funds to invest in. So, based on your goals, you could set investment horizons such as long term, medium term or short term. For instance, if you are still in the early stages of your career, retirement could be a long term goal. If you are planning to buy a house in the near future, it could be a short-term goal. If it’s your child’s college education, it could be a medium-term goal. Different assets or investments cater to each of these goals.

Allocate your assets to ensure diversification

Now that you know what your goals are and how much of a risk you are willing to take, it becomes easy to build your investment portfolio. A key aspect of portfolio management is asset allocation.

Every asset has its own qualities and you should ensure that your portfolio has a fine balance of these assets. Picking the best mutual funds to invest in ensure asset allocation and diversification automatically but apart from mutual funds, you would still need to look at your portfolio to see if you have a fine balance of all the assets. This means you need a combination of equity investments, debt products, and other asset classes such as gold. Gold serves as a hedge protection when other assets are not doing so well. When one asset category rises in value, another may come down and asset allocation ensures that you minimise losses. This is called diversification of assets to balance reward and risk.

What’s your type?

An aggressive investment portfolio may have a major portion invested in stocks and a lesser portion invested in bonds, for instance (85:15 per cent ratio, for example). A conservative portfolio may have 70 per cent investment in low-risk assets such as bonds and only 30 per cent invested in high-risk high-return assets such as equities. A moderate portfolio may have 60 per cent invested in high-risk and return assets and 40 per cent in low-risk assets.

If you are investing in mutual funds, the best mutual funds to invest in would be those that match your investment philosophy or style. There are low-risk, medium-risk and high-risk funds to choose from.

Watch out against over-diversification

Diversification is important whether it is a mutual fund portfolio or your portfolio of individual stocks. However, you would need to watch out against over-diversification, ie, when you have far too many investments and lower the chances of expected returns just so as to ensure lower risks. So, if you have 100 different kinds of stocks, the risk is lowered but at the same time, your portfolio doesn’t contain any good high-performing stocks. Also, you will have the added burden of tracking and researching these 100 stocks when you could have done with half of them. You could end up in a scenario where you don’t make any gains or losses, which beats the whole purpose of investing.

This is where optimisation of assets comes into play. Diversifying assets in such a manner that they are spread across sectors and owning stocks just enough to remove risks and increase rewards matter.

Summing up

An ideal investment portfolio should have the right mix of assets so as to ensure adequate diversification and balance risk and reward. You would need to take into account your goals and risk profile before you go about building your portfolio of investments. So, what are you waiting for? Start a trading and demat account and begin your investment journey.