Have you ever made an investment decision based on a tip you heard from a friend or colleague? You're not alone. Many investors fall prey to such decisions and end up with an unstructured portfolio which lacks any plan or strategy.
That's where the need for a well-curated portfolio arises. A portfolio is a collection of different asset classes such as stocks, bonds, mutual funds, gold, and more, that are selected based on an investor's financial goals and risk tolerance.
A portfolio approach helps in diversification which smooths out volatility and provides more consistent returns over time. It also reduces the risk of losses from investing in only one asset class. In a balanced portfolio, investments are selected rationally based on an underlying strategy.
What are the essential aspects of constructing a portfolio?
1. Risk profiling - Risk profiling helps investors decide their risk appetite, as some asset classes are inherently riskier than others. For instance, a person in her 20s with a stable career and high disposable income is likely to have a higher risk tolerance, compared to an individual in her mid-50s, with little savings who’s approaching retirement.
2. Goals - Are you looking for short-term gains or long-term growth? Do you want to generate income or save for a particular goal, such as retirement or buying a house? Your investment goals will decide the types of assets you should include in your portfolio.
3. Benchmarking - Comparing your returns to a benchmark index can help you know how your portfolio is performing and which investments to keep or sell.
4. Review / Rebalancing - Over time, market conditions may cause some investments to perform better than others. Periodic review/rebalancing helps you adjust your portfolio to ensure that it continues to meet your investment objectives.
A curated portfolio allows investors to approach investing in a structured manner. Curating a portfolio is both an art and a science, it requires significant and up-to-date knowledge about different kinds of financial instruments. The instruments then need to be blended in a proportion that aligns with the investors' goals and risk tolerance. Most individuals do not possess this expertise. In addition, even if they understand the market complexities, most people have a day job and don’t have time to monitor the markets. For these reasons, it is wise to go for a professionally managed portfolio.
What is a professionally managed portfolio?
When you fall sick, it is best to trust a doctor rather than research your symptoms online. Similarly, when it comes to investing, seeking an investment experts’ guidance can help you make the most of your money.
SEBI registered investment experts can assist or create investment portfolios/plans to help individuals meet their investment goals. These experts charge a fee in exchange for their services.
Benefits of choosing managed portfolios
1. Aligned with the market - Investment experts actively study the market and ensure the portfolio aligns with the current market conditions. For example, let’s say you have invested in a multi-asset portfolio. If the investment expert anticipates a market downturn, they may recommend you move funds to less-risky investments such as bonds or gold to protect returns.
2. Defined strategy - Every professionally managed portfolio has an underlying model or strategy for selecting assets. Investors can choose from various strategies based on their risk tolerance and goals. For example, an investment manager may construct a momentum portfolio that invests in stocks with positive price momentum over the past few months. This portfolio may be attractive to investors who believe that recent price trends will continue.
3. Better flexibility - Managed portfolios come with varying levels of flexibility. In discretionary portfolios, managers can execute buy/sell decisions on behalf of the investor. In the case of non-discretionary portfolios, a manager acts as an advisor and the final execution remains in the hands of the investor. This flexibility cannot be provided in a product like mutual funds which cater to millions of investors.
Before you choose a managed portfolio, check these:
● Track record - Check the experience of the investment manager, including their investment philosophy and performance history.
● Transparency - Evaluate the level of transparency provided by the manager, such as visibility into investment decisions and returns. Look for someone who offers regular reporting and updates.
● Portfolio churn - Check the turnover rate of the portfolio, which measures how frequently the manager buys and sells securities within the portfolio. High turnover rates can lead to higher transaction costs and potentially erode returns over time.
By investing in professionally managed portfolios, investors can benefit from the knowledge and experience of seasoned managers, rather than going through the hassle of creating and managing their own portfolios.
Be sure to check the factors discussed in this article to choose a professionally managed portfolio that aligns with your investment objectives and risk profile.
Naveen KR is smallcase manager and Senior Director at Windmill Capital
Disclaimer: The content in this article is purely the author’s personal opinion and is for informational and educational purposes only. It should not be construed as professional financial advice and nor to be construed as an offer to buy /sell or the solicitation of an offer to buy / sell any security or financial products.
The views and opinions stated in the content belong to the author. Windmill Capital Private Limited does not uphold nor promote any of the views / opinions.