Managing money can be very cumbersome and risky, portfolio investment, even more so. It is paramount to consider factors such as risk, portfolio size, and funds available at disposal. So, how can one build an effective investment portfolio? What are the types and what should be kept in mind while selecting an asset and allocating resources?
Let us find out!
This article covers:
- What is portfolio investment?
- General portfolio classification
- Types of portfolio investment
- Things to keep in mind while building a portfolio investment
- Advantages of portfolio investment
What is portfolio investment?
A portfolio investment is a method of making strategic investments. A portfolio investment is a combination of stock, bond, and/or other financial instruments (for example currencies, cash and currency equivalents, and commodities) purchased intending to make a profit from increase in value over time.
It implies asset ownership that is passive, as opposed to direct investing, which requires active management.
General portfolio classification
Portfolios are classified into several kinds based on their investing methods.
Growth-oriented portfolio investments
A growth portfolio’s goal is to accumulate large profits by accepting larger risks. Growth-oriented investments frequently entail investing directly or in listed stock of younger companies with greater growth potential than well-established organizations.
An income portfolio aims at building a large corpus over time through capital appreciation led by interest income and debt rather than aiming at stock appreciation. A portfolio of low-risk government bonds and stocks that pay heavy dividends constitute an income portfolio. The goal of income-focussed portfolio investments is to generate regular income from investments.
Value investment portfolio
An investor in a value portfolio takes advantage of undervalued assets to create a high-quality portfolio of investments. Investors look for profit potential firms that are priced below their fair market value to benefit later. Most value investors have a long time horizon for portfolio investment.
Types of portfolio investment
The risk element in a portfolio has a direct relationship with investment returns.
Investing in high risk and low-risk assets have their pros and cons. For example, when one invests in high-risk assets, the potential to profit is high, but the risk is also large. On the contrary, low-risk assets may be safer but fare poorly on returns. As a result, each investor will have a unique demand that may be met with the help of a type of portfolio.
That said, there are many types of portfolios that may be created according to the requirements of the investor. The following are the most popular forms of portfolio investments:
Risk-free portfolios contain risk-averse investment instruments such as government bonds and other low-risk investments with very low returns.
A portfolio that consists mostly of risk-free assets, with some risk-based securities thrown in to provide a mix of low-risk and excellent returns.
A portfolio that contains more risk-free securities than a high-risk portfolio but less risk-based assets than a high-risk portfolio.
This form of investment portfolio has a large number of high-risk assets with higher returns.
The mix of assets in a portfolio may be influenced by a variety of factors, including the investment horizon, the risk tolerance of the investor, and the amount of money invested.
Things to keep in mind while building a portfolio investment
An investor or financial manager should follow the given steps below to build a solid investment portfolio.
- Portfolio’s goal: To obtain direction on what investments to make, investors should address the question about the goal of the portfolio. It must be in sync with the risk profile and financial objectives of the investor.
- Investment horizon: Some investors seek to purchase and sell stocks repeatedly in a relatively short period of time. They should keep in mind that this raises transaction expenses. Furthermore, most investments pay well in the long term. That said, the choice of assets is also dependent on the time horizon the investor has to achieve their financial goals.
- Asset valuation: Given the enormous diversity of possible assets to include in a portfolio, investing may be a daunting prospect. It is important to know how much value each asset in a portfolio must hold.
- Diversification: Diversifying investments is the key to a successful portfolio. Having a varied portfolio can help mitigate risk and provide prospects of better returns.
Advantages of portfolio investment
- The portfolio investment can be used to meet an individual’s risk profile. It allows the individual to manage his or her own risk profile.
- Individuals can diversify their investments in a variety of ways keeping their risk appetite in mind.
- Portfolio of assets can assist a consistent flow of income. Dividends are not paid on all stocks. Some stocks pay dividends, while others are growth investments. If an investor’s needs for an investment fall somewhere in the middle, they can invest in a portfolio that allows them to benefit from both dividends and growth stocks to generate income as well as for capital gains.
- Investing in different assets necessitates minimal management. This will lower the transactional cost of investing and will help save money in the long run.
Portfolio management is a herculean task. Active portfolios require constant monitoring unlike passive portfolios. When making portfolio investments, risk tolerance and time horizon are critical factors to be taken into consideration.
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