An investment portfolio is a collection of different financial assets, such as gold, stocks, bonds, property, or cash. People strategically invest in these assets to build a portfolio that resonates with their risk appetite and investment horizon. Mostly, the idea is to grow their wealth while keeping their initial capital safe.

One important concept related to an investment portfolio is “diversification”. For the unaware, this means spreading investments across different asset types to reduce risk. By doing this, if one investment loses value, others might still perform well. This helps balance and optimise the overall portfolio returns. To better understand an investment portfolio, let’s study its various components and types.

If you are looking for a safe investment option, you can consider fixed deposit. They offer guaranteed returns and a fixed interest rate throughout your investment tenure.

• An investment portfolio is a collection of assets like stocks, bonds, and gold.
• People build portfolios with the sole aim of growing their wealth.
• Stocks offer higher returns than bonds but come with greater risks.
• Bonds provide more stable and safe returns. They reduce a portfolio’s overall risk.
• Diversification is another technique that reduces the overall risk of a portfolio by spreading investments.
• Some common types of investment portfolios are income, growth, and value portfolios.

An investment portfolio can be divided into three major components:
 

1) Stocks

Stocks represent ownership in a company. When you buy shares of a company, you own a part of that business and are called a “shareholder”. As a thumb rule, the more shares you hold, the bigger your ownership.

As a shareholder, you can earn money in two ways:

• Receiving dividends

and

• Earning capital gains by selling shares

Dividends are a part of a company’s profit, which is distributed among its shareholders. Next, you can also earn capital gains by selling your shares when their value increases.
 

2) Bonds

Bonds are safer investments compared to stocks. When you buy a bond, you are lending money to a company or the government. Consequently, the borrower promises to pay you:

• A regular interest, which is calculated using a pre-determined coupon rate

and

• The principal amount on the maturity date

Due to their high predictability of returns, bonds usually carry less risk. They are more stable but generate lower returns than stocks. In several investment portfolios and mutual funds, bonds are used to reduce the overall risk as they are less affected by market fluctuations.
 

3) Alternative investments

Besides stocks and bonds, investors can also invest in alternative assets like:

• Commodities (oil, wheat)
• Precious metals (gold and silver)
• Real estate

These types of investments add variety to a portfolio and can protect against market risks. For example, gold is considered a safe haven and retains value during economic downturns, while real estate can generate rental income. It is worth mentioning that alternative investments usually act as a cushion when traditional investments like stocks perform poorly.

An investment portfolio can be divided into different types based on the investor’s goals and risk levels. However, please note that, ultimately, each portfolio type focuses on either generating income or growing wealth. For more clarity, let’s understand the various types in detail:
 

Type I: Income portfolio

An income portfolio focuses on generating a regular stream of income. It does not try to grow the overall value of the investments. This type of portfolio is ideal for investors who want steady and predictable returns. For example, an income portfolio includes stocks of companies that pay regular dividends. Instead of focusing on stocks that increase in value, they prefer investments that provide consistent payouts.
 

Type II: Growth portfolio

A growth portfolio is focused on wealth creation and invests in companies that are expected to grow quickly. Investors in this type of portfolio put their money into “growth stocks”, which are shares of companies in their expansion phase. These companies reinvest their profits to grow and usually do not pay dividends.

It must be noted that growth portfolios often come with higher risks because these companies are more volatile. However, they also carry the potential for high returns and suit investors willing to take on more risk.
 

Type III: Value portfolio

A value portfolio focuses on finding investments that are undervalued in the market. It specifically looks for fundamentally strong companies whose stock prices are lower than their actual worth. The ideology behind making these investments is that the market will eventually recognise the company’s true value.

At this time, the prices of these stocks will increase, and value investors can sell them to make a profit. This type of portfolio is usually less risky than a growth portfolio but requires patience as returns may take time.

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