Friday, November 14, 2008

Investment Portfolio

A Portfolio is nothing but the collection of investment instruments held by an individual or a company.

For e.g., An investment portfolio may include shares, mutual funds, gold, bank deposits etc.

Why do we need a Portfolio?

A portfolio is formed with an investment objective & investment horizon in mind and with an expected rate of returns. The investment horizon may range from a few months to even a few decades. The rate of returns would vary based on the individuals risk taking ability. Say for e.g., you may want to save up money for your retirement. In such a case your investment objective would be Retirement and investment horizon would be 20 years. A portfolio needs to be carefully planned and monitored constantly to ensure that our investment objectives are met within our investment horizon.

Risk Tolerance

Your Risk Tolerance is something that determines the instruments to be considered in your investment portfolio. Not everyone has the same risk tolerance level. If you are single and earning a handsome salary with no financial dependents, then your risk tolerance level is very high. If you are married and you have a wife and child dependent on you then your risk tolerance level is medium. If you are going to retire and would have to safe guard the money that you have saved so far then your risk tolerance level will be low.

Risk tolerance determines the instruments considered in your portfolio. A high risk investor may expose his portfolio heavily with equity products whereas a risk averse investor may expose his portfolio only to debt or other safe investment options.

Based on your risk tolerance level we can form 3 basic kinds of portfolios.

1. Aggressive Portfolio - For individuals with high risk tolerance
2. Balanced Portfolio - For individuals with average risk tolerance
3. Conservative Portfolio - For individuals with low risk tolerance

You have to decide in which category you would fall into. It is not mandatory to choose only these 3 portfolio's. You can opt to be somewhere between an aggressive and balanced portfolio wherein your investments would neither fall under aggressive category nor would they fall under balanced.

Your investment objective & horizon and risk taking ability would determine the kind of portfolio that would suit you.

Let us talk about the specialties of each portfolio and then we will try to form a portfolio for each category.

Aggressive Portfolio:

An aggressive portfolio is one that is designed to give us returns of at least 25-30% per annum. To provide such staggering returns we must have an extensive exposure to Equities (The Stock Market instruments - Shares & Mutual Funds) Equities have been able to provide a returns of around 30% or even more year after year. An ideal aggressive portfolio would invest about 70% of its portfolio worth in Equity related instruments. The remaining 30% would be invested in Debt instruments (Bank deposits, Bonds etc) & Gold.


1. We can expect good returns on investment - at least 25% to 30% every year
2. If we begin early, then the power of compounding would work out in our favor and we would be sitting on a large saving when we are due for retirement


1. Since the equity exposure is around 75% the risk on investment is very high.

With the current market scenario people are not so confident about investing in equities. But this market slowdown is only temporary. In a few months time, the market would be back on its feet and once again equities would be providing us with the kind of returns that it has been providing us so far.

To know how to form an Aggressive Portfolio Click Here.

Note: In the current market scenario, expecting short term gains is not wise. Shares of some of India's greatest companies are available at great valuations. If we buy them now and build a solid portfolio, we are sure to make decent gains once the market is back to its bullish ways.

Balanced Portfolio:

A balanced portfolio is one that is designed to give us returns of around 15 to 20% per annum. A balanced portfolio would have 50% asset allocation in equity products and the remaining in debt products and gold. The strength of the balanced portfolio lies in the fact that, since we have a high debt allocation our investment corpus would not erode too much. The debt component would give us the balance and the equity component would help us gain the 15% returns on our investment.


1. The debt component gives us a solid foundation to our portfolio.
2. The equity component gives us the higher returns
3. Comparatively less risky than Aggressive portfolio


1. The returns are only half of what an Aggressive portfolio would give us
2. With high levels of inflation in our economy, the returns from the debt market may not beat the inflation

To know how to form a Balanced Portfolio Click Here.

Conservative Portfolio:

A Conservative Portfolio is one that is designed with Capital Protection as the main priority. With debt instruments & gold comprising around 75% we are sure to preserve our capital. Since the equity exposure is also there we can expect marginally higher returns than what a fully debt oriented portfolio would give us. A returns of 10-15% can be expected out of a conservative portfolio.


1. Our investment is safe. It may not rise too much but nor would it fall to give us losses
2. The marginal equity exposure would give us decent returns along with capital protection


1. The returns are even lesser than Balanced portfolio's
2. The returns may not even beat the market

To know how to form a Conservative Portfolio Click Here.

Managing your portfolio:

The first step would be to assess your risk tolerance level and then choose the kind of portfolio that would suit you. This is the easy part. Now comes the hard part "Maintaining the portfolio Balance"

Maintaining Portfolio Balance - is the series of actions you would have to do year after year to maintain your portfolio's balance. Let me explain with an example.

Say Mr. X invests Rs. 10,00,000/- in 2007 in an aggressive portfolio. Hence Rs. 700,000/- would be invested in Equities, Rs. 200,000/- would be invested in debt products and Rs. 100,000/- in gold.

Assuming equities are giving him a returns of 30% and debt a returns of 9% and gold 12% the current worth of his portfolio would be

Equities - 9,10,000
Debt - 2,18,000
Gold - 1,12,000

Net portfolio worth - 12,40,000/-

Hence the returns in the 1st year was 24% from his aggressive portfolio.

Since the equities gave him excellent returns Mr. X retained his equity investment as such and did not balance his portfolio to retain his original asset allocation.

This year in 2008 the equities have lost around 50% or more of their value but debt products have been able to give returns of about 11% and gold has given returns of around 15%. So at the end of 2008 what would be his portfolio worth?

Equities - 4,55,000
Debt - 2,41,980
Gold - 1,28,800

Net portfolio worth - 8,25,780/- which is a 33.5% loss when compared to the corpus at the end of 2007.

What if Mr. X had stuck to his original asset allocation of 70% equities, 20% debt and 5% gold? He would have withdrawn the excess investment from equities and distributed it across debt and gold.

Hence his asset allocation at the beginning of this year would have been

Equities - 8,68,000
Debt - 2,48,000
Gold - 1,24,000

And at the end of this year with the same kind of returns his worth would be:

Equities - 4,34,000
Debt - 2,75,280
Gold - 1,42,600

Net portfolio worth - 8,51,880/- which is a 31% loss when compared to the corpus at the end of 2007

Hence by realigning his portfolio to the original asset allocation Mr. X was able to avoid a loss of nearly 2.5% of his corpus which is Rs. 26,100/-

This is not a small amount of money. This example was just explained to illustrate the importance of maintaining the asset allocation. Once we form a portfolio and an asset allocation, we must stick to it until there is something severe that may warrant us to change it. For example with the ensuing credit crisis, bank stocks are the worst hit. At such a time we may want to reduce the allocation to banking sector. At the same time FMCG and Pharma stocks have been able to withstand the onslaught and even post growth in prices. We can reduce the allocation in banking sector and allocate that to these sectors.

Forming a Portfolio is not a one time activity. We have to constantly monitor the performance of our portfolio and realign it whenever necessary. A passively managed portfolio can never equal the returns of an actively managed portfolio.

Happy Investing...


  1. hi anand
    nice article to read , its helpful for all readers those are new in portfolio mgmt., and for all who are looking how to diversify the portfolio.
    keep writing

  2. hey man.Thanks For sharing info.I have one question.I m Doctor who has just passed out and I am doing my Internship in my college hospital where i get the salary of 3100 rupees per month and i would like to invest now.So where should i invest first? Means for investment i know its a very tiny amount I am having but still i wanna go for investment so i can get a good return at a later age.My current age is 22.So advice me what should i do?
    Thank you

  3. hi
    Nice blog
    I want some advice from you.
    I am 22 years old and i just passed out my MBBS exams and now I m getting salary of 3100 rupees per month.I want to invest some money and i m confused about it.I know its small amount to invest but still i need to invest it so i can get the better returns in future.
    Plz help me out.
    Thank u

  4. @Vicky

    I Suggest you invest Rs. 500 every month in a Equity Diversified Mutual Fund SIP and Rs. 500 in a Recurring Deposit. Total Investment every month will be Rs. 1000.

    I Agree that its a small amount but it takes a lot of motivation and determination to invest 30% of your salary and you will be able to accumulate a solid corpus if you continue your habit even after you get a hike

    All the best bro!!

  5. Sir,

    I would like to invest Rs 3000 per month.
    Should i invest in one fund or divided into three funds.
    pls advice some good mutual funds which give good return


  6. @ Sanush
    for you:
    1000 in Bank Recurring Deposit
    1000 in HDFC Prudence Fund
    1000 in HDFC Midcap Opportunities

    Invest for 1 year and then at the end of 1 year, you need to review the performance of these MF's and then renew if they are doing well.

    Remember that, these funds are doing well now and there is no guarantee in future and mutual fund investments come with an inherent risk and I hope you know that :)

    Best wishes!!!

  7. Hello
    I am 39 yrs old ,single and have been investing since 2 years in these Mutual Funds via SIP Monthly.
    My time horizon is 15 yrs.
    How is my portfolio? Does it need any correction?
    Roughly how much can I generate from this portfolio.
    Franklin India Blue Chip- Rs 4K
    Hdfc Top 200- Rs 6k
    IDFC Premiur Equity- 3K
    ICICI Pru DIscovery Fund- 3k(will start this next month)
    SBI Dynamic Bond Fund- 3K
    Reliance Gold Saving Fund- 2K (Since last yr)
    PPF – Rs 1.5 K
    New Pension Scheme- Rs 3K
    All r monthly SIPS…
    R these funds Ok…do i need changes…
    Pls analyse my portfolio and suggest me accordingly..

    1. Mr. Anonymous - Please contact me @ my email ID for a personalized investment portfolio/advise for a reasonable fee.

      My mail id:

  8. Hi sir

    I want to invest in mutualfund.
    I m investing 3.0lakh in my wife and my account ppf.
    Pl suggest me sip plan of 5k for next 10 year horizone

    1. Mr. Sanjeev - Please contact me @ my email ID for a personalized investment portfolio/advise for a reasonable fee.

      My mail id:

      Alternately you can purchase my book on Indian Income Tax.

      Who this Book is for: This Book is for everyone who is earning an Income in India and needs to pay taxes every year. The Indian Income Tax Policies are quite complex and the Government provides us adequate avenues to reduce our Tax Liability. In this book, you will learn everything you would need to know about the Tax Policies of our country as well as use the Tax Saving options to build up a "Crorepati Retirement Portfolio". To Top it all off, I have also added the best Mutual Funds that are available in the Market Right now, for you to Invest...

      Usual Price: Rs. 299/-

      New Year 2016 - Special Offer Price: Rs. 149/- (50% Discount)

      You can reach me @ my email ID for more info.



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