Financial Portfolio

A financial portfolio comprises investments like stocks, bonds, commodities, and cash equivalents. It typically centers on stocks, bonds, and cash.
Financial Portfolio
3 min
19-June-2024

A financial portfolio is one of the most fundamental requirements for a smart and rewarding investment journey. Unfortunately, many investors are unaware of the significance of a curated portfolio and how it can benefit them financially. If you too are not sure about these aspects, this article can help you.

Here, we examine the meaning of financial portfolios, understand the nuances of asset allocation and check out the different types of portfolios that you can create.

What is a financial portfolio?

A financial portfolio is a collection of different financial assets that have different levels of risk and offer varying degrees of returns. Some examples of assets commonly included in a financial portfolio include equity stocks, government bonds, fixed deposits, Sovereign Gold Bonds (SGBs), money market instruments and mutual funds.

If you are creating an investment portfolio for beginners, it is crucial to factor in different aspects to optimise the returns and minimise the risks. Asset allocation is one such important aspect you need to focus on.

Understanding financial portfolios

Financial portfolios help investors choose different assets and investment options that may together make it possible to generate the returns needed to achieve various goals. Portfolio management is an important aspect in this regard.

Diversification is key to creating an effective financial portfolio. The asset mix in the portfolio should be tailored to the investor’s goals. As these goals change and evolve, so should the portfolio.

How to manage a financial portfolio?

Curating a portfolio is only the first step in your investment journey. You also need to manage your financial portfolio effectively to ensure that the asset allocation remains optimal. Here are some steps that may help you understand more about financial portfolio management.

  • Measuring portfolio risk: Measure the risk in your portfolio periodically using tools like the standard deviation, beta, alpha, Sharpe ratio and the like.
  • Periodic portfolio monitoring: Monitor your portfolio regularly to assess how the stocks and assets are performing. This will help you take timely action in case of a negative move.
  • Portfolio rebalancing: If the asset allocation in your financial portfolio changes significantly, you need to rebalance your investments to restore the original asset mix. This may also be necessary if your goals or expectations change.

Decoding asset allocation in a financial portfolio

Asset allocation is simply the process of deciding how your capital will be allocated to the different assets that make up your financial portfolio. In other words, it tells you how much you invest — and in which assets you invest that money. When you create an investment portfolio for beginners, ignoring asset allocation can be a costly mistake.

Types of financial portfolios

Depending on the type of assets that predominantly make up a financial portfolio, the following kinds of options exist for investors.

Hybrid portfolio

This kind of financial portfolio invests in a mix of debt and equity. The debt component helps reduce the overall risk in the portfolio, while the equity component helps increase the potential overall returns. This balance makes it a suitable investment portfolio for beginners.

Investment portfolio

This type of financial portfolio is created for the purpose of meeting different investment goals. It may include a mix of stocks, bonds, other debt instruments and financial assets that help preserve capital and potentially create wealth over a given timeline.

Aggressive equity-oriented portfolio

This type of financial portfolio aims to give the investor the benefit of growth and capital appreciation. They typically invest in high-growth stocks and assets that have the potential to grow dynamically and steeply in the future. The corresponding risk in such assets is also high, making growth portfolios high-risk-high-reward investment avenues.

Defensive equity-oriented portfolio

Defensive portfolios predominantly focus on investing in defensive stocks and sectors. The objective of this portfolio is to provide safeguard from different risk factors i.e. unpredictable price movements and other high levels of risks. Some examples of such sectors include healthcare, utilities, telecommunications and defence.

Income-focused equity-oriented portfolio

These financial portfolios may invest in the stocks of companies that offer dividends. Such companies are typically well-established large-cap entities. However, many companies in the defensive sectors may also offer dividends regularly. These financial portfolios focus on such stocks to give investors the added benefit of income along with potential capital appreciation.

Speculative portfolio

A speculative portfolio is a highly risky mix of assets that are typically speculative. Due to different factors like a lack of historical data, unpredictable price movements and generally high levels of risk, it may be impossible to evaluate how the prices of these assets may move. As a result, such a financial portfolio is best suited for aggressive investors.

Value portfolio

A value portfolio focuses on assets that are currently undervalued by the market. For instance, such financial portfolios may invest in the stocks of undervalued companies. These stocks may have the potential to appreciate over time, as the market realises its true value, leading to increased demand.

Cyclical portfolio

A cyclical portfolio is a financial portfolio that focuses on cyclical market sectors and assets. These are the opposite of defensive assets because their prices are affected by changes in the market cycle and broader economic changes. Some examples of sectors that are cyclical include automobile, technology, travel and tourism and the like.

How risk tolerance affects portfolio asset allocation?

Generic portfolio curation may not account for the individual risk tolerance of an investor. It may focus on stocks and securities with varying levels of risk based on the key objective of the portfolio. However, if you want to tailor a financial portfolio to your unique investor profile, you need to factor in how much risk you can tolerate.

The asset allocation depends on this factor. If you can take higher risks, an equity-focused portfolio may be suitable. Alternatively, if you prefer to reduce the risk taken, a hybrid or debt-focused portfolio may be better.

How the time horizon affects portfolio asset allocation?

Much like risk tolerance, an investor’s time horizon also plays an important role in deciding the asset allocation. If you have several years to achieve a goal, you may find it easier to opt for an aggressive equity-focused asset allocation.

However, as a new financial goal approaches, it may be smarter to switch to a more conservative asset allocation to preserve the corpus created for that goal. For instance, if you are in your 20s or 30s and planning for your retirement, you can afford to create an aggressive portfolio for this purpose. However, in your 50s, you may need to steadily change the asset allocation to reflect a more conservative outlook.

How to create a financial portfolio?

Creating a financial portfolio by yourself is a process that requires several informed decisions. You need to first outline the goals that you wish to achieve.

Then, you must understand your risk tolerance and your risk capacity. Your risk tolerance indicates how much risk you are comfortable with, while your risk capacity indicates how much risk you can afford to take, given your financial situation. Both these factors are important in creating a financial portfolio.

You should also be clear about the time horizon involved. It is always advisable to choose short-term investments for immediate goals and long-term investments for goals that are further off.

Based on these aspects, you need to compare and shortlist different investment options. Then, depending on the returns you expect and the risk you can take, you need to decide what the ideal asset allocation is and create a portfolio accordingly.

What makes a good financial portfolio?

A good financial portfolio should balance risk and returns as required by the investor. So, what works for one investor may not be the best option for a different investor. The best financial portfolio for you is one that addresses your unique needs and is curated to help you achieve your goals as planned.

Typically, however, a good financial portfolio should be adequately diversified, so the concentration risk is minimal. It should also adapt to the changing needs and goals of the investor.

How to measure portfolio risk?

Measuring portfolio risk involves evaluating the potential for loss and assessing how the returns from the portfolio vary with time. To do this, you can use metrics like the standard deviation and beta of the portfolio.

The standard deviation measures the volatility of an asset's returns and the beta compares an asset's volatility to the market’s. Additionally, you can also use metrics like the Value at Risk (VaR), which estimates the maximum loss that may be incurred over a specific period.

Conclusion

Diversification is an important part of creating an investment portfolio for beginners and seasoned investors alike. One investment option that offers the benefit of inherent diversification is a mutual fund. You get exposure to different stocks, bonds, securities and market segments by choosing a mutual fund scheme that aligns with your risk-reward profile.

The Bajaj Finserv Mutual Fund Platform makes it easy for investors to compare mutual funds and make an informed choice. With over 1,000 schemes to choose from, you can easily identify the right funds for your financial portfolio and make a lump sum investment or start a SIP in the fund of your choice.

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Frequently asked questions

How can you create a financial portfolio?
To build a financial portfolio, you need to assess your risk tolerance, identify your financial goals and evaluate different investments to see which of them align with your risk preferences and goals. You can then invest in these assets in the optimal asset allocation.
What is the benefit of having a financial portfolio?
A financial portfolio can be beneficial in many ways. You need a sufficiently diversified portfolio to minimise risks.
What are the steps involved in portfolio management?
To manage your financial portfolio, you need to have clear objectives, find the optimal asset allocation, choose effective investment strategies and invest in the selected assets. Thereafter, you should monitor the portfolio and rebalance it if required.
How to select investments for an investment portfolio for beginners?
To choose suitable investments for an investment portfolio for beginners, ensure that you have a clear idea about the goals, your risk preferences and the ideal asset allocation. Based on these factors, you can select investments for your portfolio.
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Disclaimer

Bajaj Finance Limited (“BFL”) is an NBFC offering loans, deposits and third-party wealth management products.

The information contained in this article is for general informational purposes only and does not constitute any financial advice. The content herein has been prepared by BFL on the basis of publicly available information, internal sources and other third-party sources believed to be reliable. However, BFL cannot guarantee the accuracy of such information, assure its completeness, or warrant such information will not be changed. 

This information should not be relied upon as the sole basis for any investment decisions. Hence, User is advised to independently exercise diligence by verifying complete information, including by consulting independent financial experts, if any, and the investor shall be the sole owner of the decision taken, if any, about suitability of the same.