Portfolio Investment & Types Explained
A portfolio is a basket of different financial assets owned by an investor. The goal is to fulfil financial objectives. Your portfolio can include many types of financial assets. These include mutual funds, property, gold, equity shares, derivatives, debt funds, and more. With a diversified portfolio, you can cut your risk and earn greater returns.
There are different types of portfolio investment available to an investor. However, before choosing the type of portfolio that's right for you, you must consider many factors. These include risk appetite, financial objectives, and investment horizon.
What Are the Types of Portfolio Investment?
Depending on the strategies used for investment, there are different portfolio types.
An aggressive portfolio indicates that investors take greater risks to earn high returns. The stocks in this portfolio have high risk and thus, show a higher fluctuation in price.
It is one of the most popular portfolio types, but investors must manage risk wisely. If you want to achieve success with an aggressive portfolio, you must keep losses to the least and take profits.
In a defensive portfolio, the stocks don’t have a high beta. They are more or less secluded from major market movements. Besides, the investor’s strategy is to reduce the risk of losing capital.
Investors distribute a large part of the portfolio’s fund into fixed-income securities. As a result, you can build a defensive portfolio easily if you have a low-risk appetite.
A growth portfolio aims at promoting growth by accepting more significant risks. It includes investing in companies that are witnessing growth.
This particular portfolio type comprises investments that help in earning money from dividends. An income portfolio helps you earn a positive cash flow. You invest in companies that offer a part of their profits to shareholders in return for a favourable tax status.
Income portfolio stocks perform according to the prevailing economic conditions. As a result, this is one of the portfolio types that can produce a better return than the market average during a downfall.
If you look at all the types of portfolio investment, the speculative portfolio carries the highest risk. Investors could use the speculative strategy on stocks that could be takeover rumour targets or initial public offerings (IPO).
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In this portfolio, investors can have healthcare and technology companies that are ready to launch a breakthrough product. Investors must perform due diligence when they are building a speculative portfolio since it carries a very high risk.
A hybrid portfolio offers a lot of flexibility. It is where an investor takes an interest in passive investments like art. Some high-grade government or corporate bonds and blue-chip stocks are the fundamental part of a hybrid portfolio.
In this type of portfolio investment, there is a mix of bonds and stocks in a fixed proportion. Besides, it offers diversification across varied asset classes, thereby lending stability.
Also Read: Foreign Direct Investment
The Need for Portfolio Management
Sound portfolio management helps investors build the best investment plan as per their financial goals, risk capacity, age, and income.
The different reasons why you need active portfolio management include:
- It increases the chances of generating more profits.
- It lets you cushion investment-oriented risks.
- It helps to rebalance asset composition and develop sound strategies based on the market condition. As a result, it allows investors to make the most of their current investment.
- Based on market conditions and immediate financial requirements, active portfolio management enables quick customization.
- It helps to assess which investments work best under which market situation.
- It lets you understand how you should divide resources into different asset classes.
After learning about the different portfolio types, you must choose assets to achieve your investment goals. You must read about the fundamentals of every asset type. Moreover, you must determine the most suitable investments to hold in your portfolio for generating maximum returns. To build a sound investment portfolio, you must determine its financial goal. You must also rebalance its components often.
Also Read: Foreign Portfolio Investment
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Frequently Asked Questions
There are many benefits of having a diversified portfolio. Firstly, it reduces the impact of market volatility. Secondly, it helps to preserve your capital. Thirdly, it gives you peace of mind. Lastly, it helps manage risk. In a nutshell, you can diminish risk by investing in different financial instruments.
There are a few factors that every investor must keep in mind to manage their portfolio. The composition should depend on the amount invested, investment horizon, and risk tolerance. The portfolio of a high-net-worth person includes commodities, timber, and real estate. The portfolio of a young investor includes exchange-traded funds or mutual funds.
The components of an investment portfolio include stocks, bonds, and other investment instruments. It could also include your investments in real estate, gold, oil, etc.
An investment portfolio is a compilation of financial assets. These assets include stocks, commodities, bonds, money market instruments, and more. Investors try to include various investment options in their portfolios. Their portfolio is a reflection of their financial objectives and risk appetite.