Simple investment portfolio strategy for persons from different risk profile

Today I am saying you about the strategy each person have to have when preparing there portfolio as the part of their financial plan. Risk assessment is the major part of portfolio planning and that is the base to decide how and where a person should invest to build his investment portfolio. In this article I am bypassing the other required factors in a portfolio construction like age, financial back ground and investment horizon.

To ease the complication and understand the same well, I am classifying the investor to three groups as per their different risk taking capacity. Aggressive, moderate and conservative. The method and model portfolio mentioned in this article have a time horizon between 5 to 15 years.

An aggressive person can take risk till the maximum extend and he can design a portfolio with an 80 to 100% of equity exposure. He can balance his portfolio depends on his age and I have mentioned the balancing rule in my previous article. The investment instruments for the person in aggressive group can opt any of the following or combined instruments:

1. Well performing equity mutual funds, thematic and sector funds through SIP in each year to build a core equity portfolio will be a good option. He can have equity exposure and risk diversification with national equities by investing the above funds as well as overseas equities by purchasing mutual funds that is investing in the stocks in overseas companies.

2. Investing to equity market through Index funds offering by Mutual fund houses. This will enable him to have a portion invested in each companies listed in the given index. This is a successful hedge against huge volatility in the market and getting handsome profits in the future. It is because the funds investing in the total companies listed in the index and the fund will grow with the companies, they are growing.

3. ETF or Exchange Traded Fund is an another option for the people in aggressive class. Through ETF one can purchase the units using online trading and dmat account as like purchasing commons stocks. ETF also a form of index funds but it is trading centrally in the stock exchange just like any other shared.

4. Investing through ULIP’s are another option for the investors from aggressive group and have very long term investment focus of 10 years or more. Because of the costs in ULIP is comparatively high with what mutual funds offering, required enough time to grow your fund and get good returns in the future. It is not advisable to an investor with short term focus of 5 years to 10 years to buy a ULIP. This article will give you great idea to assess the ULIP yourself before buying and ULIP product.

5. An investment in Gold and Real estate can be a good option for his portfolio to protect and hedge against inflation and handsome retunns in the future. One can invest in golde by buying physical gold or purchasing Gold ETF units from stock market. Direct investment in real estates, residential properties and even Real Estate Funds are his option to get proper exposure in real estae in his portfolio.

Whether you are in the class of aggressive or any other, it is recommended to have a good balance or portion of your money in the debt instruments to protect against any possible lose from stocks. A person who us aggressive and near to the pension time is not advised to put 80 to 100% of his money to the stock or equity related instruments. Instead, he should balance his portfolio with a mix of majorly debts and less equity instruments. It is a must requirement of those who are invested in equity, to monitor and balance the portfolio time to time to avoid huge loses and receive possible profits.

The portfolio for a moderate risk averse person is little different from the above. Instead of 80 to 100% investment in equity and equity related investment vehicles, a moderate person should choose a balanced portfolio of 60% in equity or related instruments and the rest 40% in the debt instruments. A proper monitoring and balancing the portfolio will enable him to tap all the profits from the equity instruments and move to debt instruments to balance his portfolio in a great extend. Below are the possible investment methods available for a moderate risk averse person.

He can put his 60% money in the Equity mutual funds but not thematic and sector funds, which is bearing huge risks, through SIP (Systematic Investment Plan) to avoid possibility of huge lose and leverage the minimum security of disciplined approach.

He can also choose the Index mutual funds and Exchange traded fund as the part of his equity portfolio. To hedge against the possible inflation and possible handsome returns, he can invest in the gold directly or through Gold ETF's as well as real estate through direct purchase ot through real estate mutual funds.

He can too, prefer the ULIP investment path once have a long term investment horizon of 10 to 15 years or more, as I said in the previous paragraph. But a moderate amount is advisable compare with an aggressive person.

In the side of debt, it is not completely coming under the secured or government backed instruments instead, an instruments with very minor or moderate equity exposure can be his investment vehicle. To achieve this, he can choose Monthly Income Plan mutual funds, Balanced Mutual funds etc through SIP process. A small percentage of his money for debt instrument can be invested to the pure debt funds like post office schemes, bank FD’s etc.

Now we are in the last stage of this article with a person who is conservative character. The portfolio selection for this kind of investors required more attention and care because they will not be able to bear any kind of lose of their money. In most cases, it is difficult to understand and convince him the exact situation.

It is better idea to have a portfolio of 80% in debt instruments and 20% in the instruments where very moderate equity exposure available. A person from this category can build a portfolio with Traditional Debt instruments like Bank FD’s, Post Office Savings schemes, National Savings Certificates, secured and rated government bonds, Public Provident Fund account investment etc.. He can also prefer investing in the real estate by buying land or residential properties.

From the mutual fund space, liquid and FMP funds are his best friends because of the safety providing. Instead of investing in ULIP, such people can opt traditional Life Insurance products like money back policies, endowment plans for there insurance requirements.

Rest of 20% money can invest in the moderate equity exposure mutual funds like Monthly Income Plans or MIP’s, various income funds, and funds that pointed to money market investments with very moderate equity exposure. He can also put the money to some of the good balanced funds too..

He can also choose gold as a best investment instruments because its popularity and profit giving nature as well as the hedge aganst inflation.

There are different methods to identify one’s risk profile. Various good questionnaires available in the internet to check the risk profile of one. In a thumb rule an aggressive person can bear 70% of his money lose, moderate can 30% and conservative not ready to bear 10% of less in worst case.

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