Portfolio investing is a process that involves buying and acquiring a group of financial assets, including bonds, gold, stock, commodities, real estate, other securities, and private equity, to maximise returns through diversification and manage risk.

The asset mix of your investment portfolio depends on your financial goals, risk appetite, and investment horizons. Since the markets are dynamic and fluctuate in value, it is important to review your investment portfolio regularly to maintain your optimal asset allocation needs.

• Portfolio investing balances risk by diversifying across asset classes like fixed deposits, equities, and gold, ensuring stable returns even in volatile market conditions.
• Combining different asset types can boost returns without increasing overall risk, due to careful asset allocation.
• Creating a portfolio of 2-4 mutual funds, instead of relying on a single one, diversifies fund manager styles and asset classes, optimising returns and reducing risks.

Portfolio investing operates to maximise returns to attain financial objectives while mitigating risks. The fundamental approach here is recognising the fact that all the different asset classes will perform differently through various economic cycles. While some will have more risk during a particular economic cycle, other asset classes in the mix will make up for it and prove to be more rewarding.

Portfolio investing is based on the tenet of diversification, which reduces risk while simultaneously providing ample avenues to generate higher returns.

Let us understand this with the help of a few portfolios:

Portfolio 1

• FD: 70%
• Sensex: 40%
• Gold: 35%

In Portfolio 1, the combination of asset classes—Fixed Deposit (FD), Equity (Sensex), and Gold—helps reduce risk by 50% compared to holding a single asset like gold alone. Here's how:

• Fixed deposit (FD): Being a secure, low-risk investment, FDs provide stability to the portfolio. With 70% of the portfolio in FD, it anchors the overall risk since the returns from FDs are predictable and less volatile.
• Equity (Sensex): Equities tend to have higher potential returns but also come with higher risk. However, by allocating only 40% to equity, the overall exposure to market fluctuations is balanced by the stability of the FD portion.
• Gold: Gold often acts as a hedge against inflation and market downturns. By allocating 35% to gold, the portfolio benefits from gold’s protective nature during periods of economic uncertainty.

Portfolio 2

• FD: 25%
• Equity: 35%
• Gold: 40%

Returns increased by 20% without a change in risk.

In Portfolio 2, the combination of fixed deposits, equity, and gold helps increase returns by 20% without increasing the overall risk. Here’s why the risk remains controlled while boosting returns:

• FD (25%): Although a smaller portion compared to Portfolio 1, FDs still provide a stable foundation for the portfolio. This low-risk investment helps anchor the portfolio and mitigates volatility from the riskier assets.
• Equity (35%): Equities typically offer higher returns but also come with greater risk. However, allocating only 35% to equities keeps the portfolio's exposure to market volatility in check. The remaining portion in less volatile assets (FD and gold) balances the overall risk, ensuring that equity’s high potential returns don’t drastically increase risk.
• Gold (40%): With 40% allocated to gold, the portfolio benefits from gold's resilience in economic downturns and market corrections. Gold serves as a buffer against market volatility, ensuring that risk is further spread out.

There are several reasons to invest in a portfolio of mutual funds, but the key benefit is diversification—both across fund managers and asset categories. Since no single mutual fund is inherently the best, it's wise to build a portfolio of 2-4 funds to balance risk and return.

Start by defining your investment goals and risk tolerance. Then, select mutual funds that align with these goals and assign appropriate weightings to each. This strategy ensures a balanced approach to investing, rather than relying on just one fund.