Forming your portfolio: Things to keep in mind

Forming your portfolio: Things to keep in mind

For an artist, a portfolio is a collection of his paintings. And for an investor, a portfolio is a collection of his investments. You may think that investing and painting have nothing in common. However, the ability to pick the right investments for your portfolio is an art in itself. Here are some things you should keep in mind so that you can create a profitable portfolio:

1) Identify your investment goals

You can create an investment portfolio by simply investing in a bunch of different investments. However, that may not be the ideal way to reach your financial goals. Don’t invest just for the sake of investing. It is important to have a list of goals you wish to achieve. And your portfolio should work towards helping you reach these financial goals.

You need to ask yourself:
a) When do you require money in the future?
b) How much money do you need at the time?
c) How much can you invest right now to achieve those goals?
Identifying the capital amount that you can invest as well as your future goals is the first task of creating a portfolio. From this, you can identify which investment avenues are the best options for you.

2) Diversify

When you talk about investments, the first two options you hear are stocks and bonds. Sure, stocks and bonds are popular investment options but they are not the only options. For example, if you invest all your money in stocks, you can risk losing the entire amount in case of a market crash. And by not considering other avenues, you might miss out on the opportunity of getting better gains. Alternative assets like commodities, real estate and gold are viable options too. You need to spread your investments across different assets in order to minimise your losses and maximise your returns.

3) Create a portfolio strategy

When you create a portfolio, it is necessary to have a sound portfolio strategy. There are two strategies commonly used by investors in the market:
a) Active portfolio strategy
b) Passive portfolio strategy

If you have the financial means and the ability to digest the risk, the active portfolio strategy might be suitable for you. Otherwise, it is better to stick with the passive approach.

4) Have a long-term focus

Don’t make hasty investment decisions based on peer pressure or current market trends. Identify your investment goals and stick with your investments. This can steadily help you achieve your goals in the long term. But if your funds don’t perform as per your expectations, it may be necessary to reshuffle the portfolio. There is no point in investing your money in a fund that does not perform well. Your money can be better deployed in a fund that offers higher returns. In such a scenario, you can strategically rebalance your funds.

5) Maintain an optimum number of investments

How many investments should you have in the portfolio? Should it be five, 10 or more? To this question, there is no single correct answer. There is no perfect magic number. Having very few funds can be risky. At the same time, too many funds can be pointless. Many investors assume: more the number of funds, better the diversification. This is not always true. In fact, after a certain point, there can be an overlap in funds. However, experts recommend not more than ten funds for optimum diversification.

To sum up

It is good to maximise the returns of an investment but better to maximise the returns of the entire portfolio. Keep the above points in mind when creating your portfolio to achieve financial success.


Disclaimer: Investment in securities market are subject to market risks, read all the related documents carefully before investing.


Do you know how to invest?

Do you know how to invest? Take this quiz to find out 1) You are planning to buy a house in the next 10 years. The most efficient way to reach this goal is to:a) Put your money in a bank savings accountb) Invest in the stock marketCorrect answer: (b)Buying a house is a costly affair. Investing in the stock market can help you earn much higher returns compared to a bank savings account. In addition, since this is a long term goal, the risks are also considerably reduced.2) What is a prospectus?a) It is a legal document that is issued by companies offering securities for saleb) It is a document that lists out the future prospects of a companyCorrect answer: (a)A prospectus is a legal document that each company has to issue before at the time of an Initial Public Offering (IPO). It contains important information such as the company’s financial details, its risks, opportunities and future goals.3) Your friend tells you that investing in stock X will double your returns in 3 monthsa) Invest in the stock right awayb) Research the stock carefully before you consider investing Correct answer: (b)Unsolicited tips in the stock market are very common. That doesn’t mean they are right. Never invest based on tips. Always do your own analysis before putting your money on a stock. 4) Swati is a risk-averse person. It is better for her to invest in:a) Mutual fundsb) StocksCorrect answer: (a)For a risk-averse investor, it is better to invest his/her money in mutual funds. The returns may not be as high as stocks but they offer greater security to invested capital compared to stocks.5) The stock market has taken a major downturn. You shoulda) Immediately sell all your stock holdingsb) Wait and watch before you take any hasty actionCorrect answer: (b)The stock market can be very volatile. But that does not mean you take out your investment every time the market sees a downturn. If you are a long term investor, it is best to wait and observe why the market crashed. If the reasons are only temporary, you can wait until the market regains its upward momentum.6) Which of the following is false:a) Diversifying your investment portfolio helps you minimize your lossesb) Short selling is a process of selling a stock first with the intention of buying it later at a lower pricec) It is possible to predict future price of a stock based on past price movementsCorrect answer: (c)The future price of a stock is not determined by its past performances. As a result, it is not possible to predict a future price based on past patters. That said, it can be useful to study the past performance to gain a better understanding of a stock. 7) Girish wants to create an emergency fund. He should consider investing in:a) Short term debt fundsb) Stock marketCorrect answer: (a)For an emergency fund, it is best to invest in short term debt funds. These funds offer high returns and they are easily accessible. You can withdraw the money very quickly in case of an emergency. But most importantly, they offer higher degree of capital protection compared to stocks.8) Geeta is retiring in 5 years. Currently she has 80% of her investments in the stock market. a) She should retain her investments in the stock marketb) She should slowly transfer her funds to less risky investment avenuesCorrect answer: (b)Investments in the stock market offer high returns. But as a person nears retirement, it is safer to transfer the funds to more stable investment avenues such as debt funds. You don’t want to risk losing a major chunk of your investments when you are about to retire. 9) When you buy a bond issued by a company:a) You become a part owner of the companyb) You lend money to the companyCorrect answer: (b)When you buy a bond, you are basically lending your money to the company. In return, the company promises to pay you a specific sum of money as interest. And at the time of maturity, the company returns your money.10) The stock market in India is regulated by:a) The Reserve Bank of India (RBI)b) The Securities and Exchange Board of India (SEBI)c) The Insurance Regulatory and Development Authority of IndiaCorrect answer: (b)In India, SEBI is the designated financial regulator body. It enforces regulation in the investment markets and maintains an efficient and stable environment in the financial markets.Final score:How did you score?0-3: you may want to brush up on your knowledge on investments4-6: Good start. You do have a fair bit of knowledge about investments. But try reading more on the subject to become an expert investor7-9: Great going! You are nearly there.10: Excellent performance. You are now a stock market superstar.   Disclaimer: Investment in securities market are subject to market risks, read all the related documents carefully before investing.

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How to buy stocks

The two biggest stock exchanges in India are the Bombay Stock Exchange (BSE) and the National Stock Exchange (NSE). Together, there are more than 6,000 companies listed on their platforms. With literally thousands of options in front of you, it can be tough to pick the right stocks for your portfolio. In other words, where do you even begin? Here are some tips that can help you make the right investment decisions. 1) Familiar with a particular sector? Start thereIt is always good to know how a company or a sector functions before you invest. For example, if you are in the healthcare industry, you might already have useful knowledge about how pharmaceutical companies function. You can utilise this knowledge for your investment gains. Beyond that, you can start investing in companies with business models that are easy to understand. Even the great investment guru Warren Buffett says that he does not invest in companies and industries that he does not understand. 2) Check the financial healthGo through the financial records of the company to find out its financial health. Take a look at the company’s track record regarding revenues and profits. There are three important financial statements you should read and understand before investing in a company. They are: These three statements paint a financial portrait of the company. By reading these statements, you can get an idea if a company is profitable or not. And while the profitability of the company is important, it is also necessary to see what the debt situation is. It may not be a good sign if a company has large amounts of debt when compared to its competitors. 3) What is the stake of promoters?Promoters are individuals or organisations who are generally the biggest shareholders in a company. In many cases, these promoters have key executive roles in the company. That’s why keeping tabs on their investment holdings can offer clues regarding the future prospects of a company. So when promoters increase their shares, it is taken as a good sign for the company. 4) Looking for a regular income: dividends are your answerMost people invest in the stock market for two reasons: steady income at the present or high returns in the future. If you are interested in a regular income, then it is best to invest in stocks that offer dividends. Blue chip companies that have reached the maturity stage of the growth cycle tend to offer good dividends to its investors. By investing in such companies, you can earn steady returns to finance your current needs. 5) Long-term investmentsThe stock market is an ideal investment avenue if you want to invest for the long term. Warren Buffett once said: “If you aren’t willing to own a stock for ten years, don’t even think of owning it for ten minutes.” Look out for stocks that have high growth potential in the next five to 10 years. For example, if a company reinvests its profits back into the business, it is an indication that the company has good growth potential. This way, the company positions itself for long-term growth and success in the market. By investing in such stocks for the long term, it is possible to create a big corpus for your future goals such as buying a house or retirement planning. ConclusionBuying stocks is a science as well as an art. With more experience in the stock market, you can become a better investor. But to reach that state, you need to put in time and effort to learn and understand the different aspects of the stock market.     Disclaimer: Investment in securities market are subject to market risks, read all the related documents carefully before investing.

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