Tuesday, November 18, 2008

Aggressive Portfolio

An aggressive portfolio is designed with the motive of earning high returns on our investment. This is suitable only for high risk investors for whom capital preservation is not a priority. They are ready to take the risk to ensure that their money is growing at a rate that far outpaces inflation.

An aggressive portfolio is one that has exposure to equity related components to the level of at least 70% or more. The remaining portion is invested in safe instruments like bank deposits, NSC, PPF etc. To check out the safe instruments available for investment check out the article on Conservative Portfolio.

Why is the Aggressive Portfolio High Risk?

Since we are investing at least 70% of our portfolio in Market related instruments the aggressive portfolio is considered high risk. The Market may go up or down based on the global economic conditions. We cannot always predict the direction of movement of the market. Under th current economic scenario, the market is going down drastically and a lot of people who have invested their money in market related instruments have lost a bulk of their investment. Hence investing in the aggressive portfolio would involve taking a huge risk which may not be apt for everybody.

Instruments that can be considered for the Equity component:

1. Equity Shares - If you watch any news channel or listen to any of your colleagues talking you would have invariably heard the term "Shares". The term shares used here refers to "Equity Shares". "Equity Shares" are the most common types of shares and are the most widely traded stock market instruments.

"Equity" means ownership. Anyone who holds one share of XYZ company owns a portion of the company. To know more about what equity shares are click here

2. Mutual Funds - A Mutual Fund is nothing but a common pool of money collected from a lot of people which is used by an experienced fund manager who invests the money in the Share market. Not many of us are experienced in investing directly in the Equity market. Mutual funds are a boon to the investor who doesn't have enough knowledge to invest directly in the market but wants to take a risk and gain higher returns from the market. To know more about mutual funds click here

You can invest in Diversified Equity MF's or ELSS MF's or even Sector specific MF's.

A Sample Aggressive Portfolio:

This portfolio is for somebody who can invest Rs. 1 lac every year. You can adjust the amounts according to the amount you can invest.

Direct Share investment - 30% -> Rs. 25,000/-

This amount can be directly invested in Large Cap stocks that have been growing at a consistent pace over the year. Pls check the article on criteria to be considered before choosing stocks so that you can choose good stocks for your portfolio.

Do not invest the whole amount at one shot. Buy in a phased manner. Say for e.g., buy shares worth Rs. 5,000 every alternate month.

A Systematic Investment Plan (SIP) in a Diversified Equity Mutual fund for Rs. 2000/- per month which is Rs. 24,000/- per annum
A SIP in an ELSS Mutual fund for Rs. 2000/- per month which is Rs. 24,000/- per annum

Investing the SIP way is the best way to invest in Mutual funds because they average out the cost of purchase because we keep buying even when the maket is down.

Gold - 5% -> Rs, 5,000/-
Bank Fixed Deposits - 20% -> Rs. 20,000/-

Net amount invested = Rs. 98,000/-

What Returns can you Expect out of this portfolio?

Usually the returns of an aggressive portfolio would be exceptional during bull markets and the losses we suffer may also be extensive in case of economic crisis.

Lets say the Shares gave us a returns of 25% this year and the Diversified Equity fund a return of 30% and our ELSS fund a return of 23%. Gold a return of 15% and Bank Deposit a return of 10%

Share value at the end of one year - Rs. 32,500/-
Diversified Equity MF Value at the end of one year - Rs. 31,200/-
ELSS MF value at the end of one year - Rs. 29,520/-

Gold value at the end of one year - Rs. 5,750/-

Bank FD amount at the end of one year - Rs. 22,000/-

Net portfolio worth = 1,20,970/-

Returns on investment = 23.4%

Happy Investing...

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