An investment portfolio is one of the first words an investor encounters when they commence their investment journey. How much you invest can deliver the desired results only when you possess the right investment portfolio.
While there is no ideal portfolio one can hold, there are different types of portfolios to choose from. Tailoring your portfolio to your investment goals, investing style, and risk profile can go a long way in helping you to reap the benefits.
Wondering what are these types of portfolios you can consider? Read on to know more.
What is an investment portfolio?
Let’s start with the basics.
In simple terms, a portfolio can be defined as a collection of the investments you have made. Whether it is equity shares, bonds, NCDs, or any other financial asset, whatever you have invested in with an expectation to get returns are part of your investment portfolio.
The word owes its origin to the Latin word ‘portafoglio’, which loosely translates to a case meant for carrying papers. In the case of investments, you can think of it as an abstract reference to the collection of investment assets.
What are the different types of portfolios?
In terms of your investment strategy, portfolios can be divided into two broad categories:
Strategic investment: This refers to purchasing financial assets with the sole goal of earning long-term returns. As a result, an investor holds on to the assets for a very long period.
Tactical investment: When an investor adds assets to their investment portfolio by buying and selling to achieve gains in the short term, it is known as tactical investment.
Here are some of the most popular types of portfolios you can consider as you keep investing in more assets:
Anyone who is looking to build a pool of investment assets to secure their future post-retirement can consider this type of portfolio. Given the declining interest rates, anyone serious about building a solid post-retirement portfolio is more focused on having a blend of investment assets by investing in both income-oriented and growth-oriented options. This portfolio will perform as per expectations as long as you avoid parking your funds in any speculative assets.
Diversified asset classes portfolio
This is one of the most popular portfolio types. With the inclusion of different asset categories. You can protect your investments under different market conditions and reduce the risk of running significant losses. Even if one of the asset categories performs badly, you will still be able to recoup your losses thanks to the other categories in your portfolio.
The major asset categories include stocks, bonds, commodities, and cash. How to divide your investment between various categories depends mainly on your end goals. For instance, if the ultimate goal of savings is for retirement or college funds, you should have some exposure to stock or mutual funds. Therefore, it all boils down to making the right asset allocation. You can work out your own formula based on your goals and risk profile or solicit the help of an expert who can guide you in the right direction.
Also, remember that diversification should be not only restricted to various categories but also within each asset category. For example, if you are investing in equities, try to have a healthy mix of foreign and domestic equities.
This portfolio type is commonly known as the defensive portfolio. As the name suggests, the approach is extremely conservative, with a focus on capital preservation. You want to keep the risk to the minimum to offer maximum protection to your investment money.
This portfolio type is common with investors who are nearing retirement or do not have the appetite to risk too much capital. They want to play safe and get the maximum returns possible. The best way to build this portfolio is by investing more in bonds and income-oriented dividend stocks. Usually, conservative portfolios have a chunk of the money invested in lower-risk products such as money market securities and other lower-risk products.
This is also known as a capital appreciation portfolio. It is suited for young investors who have a good risk appetite and do not shy away from taking risks. The majority of the investment is in volatile products. So expect a lot of stocks of growing companies that are yet to establish themselves to be profitable. Some aggressive portfolios may also invest in cryptocurrencies.
As is the case with any investment, one should be extra cautious when building an aggressive portfolio. It is best to consult experts before parking your funds because you don’t want to take a huge gamble and risk losing everything.
Socially responsible portfolio
This portfolio is for investors who want to do good for society through their investments. The goal of the portfolio can be both growth and asset preservation. It is suited for any level of risk appetite and investment goals. The idea is to invest in stocks and bonds of companies that have minimal impact on the environment or want to reverse environmental changes or promote more diversity and inclusion in society.
As the name suggests, a hybrid portfolio has a mix of investment assets. It can range from bonds, stocks, commodities, real estate, or even art or antique objects. Conservative investors would build a hybrid portfolio by mixing up blue-chip shares and bonds. The main advantage of a hybrid portfolio is that it automatically offers diversification.
Only those with a very high-risk appetite should venture toward building a hypothetical portfolio. Typically, investors opt for IPOs of companies that are doing cutting-edge work. The idea is these stocks are supposed to do well in the future once the company makes a breakthrough in research.
However, financial advisors usually recommend limiting your exposure to speculative assets. Ideally, it should be 10 percent or less. If you are just starting with investments, it is best to avoid this portfolio as it requires a nuanced understanding of how different assets perform in market conditions. Once you gain some experience, you can target this portfolio and get phenomenal returns.
Creating the right portfolio may not always be a walk in the park. Now that you are familiar with what are the different options in the market start your journey now. If you need help understanding which is the right choice for you or which product you should invest in, get in touch with the experts at Moneyfront. Our team of experts is here to help you navigate through your investment journey.