Individuals who invest are faced with the decision of choice of investment vehicle and asset classes. They have to choose the asset classes based on their risk appetites and expected rate of return. Various factors affect the investment decisions of an individual such as the age of the investor, income level, savings rate, risk appetite, investable surplus, the rate of return expected etc. Investors often rely on the share trading tips from investment or portfolio managers for their investment decisions.
A portfolio manager is a professional who aids the investor in attaining their investment goals by placing their funds in appropriate investment vehicles, based on the risk appetite of the investor. Portfolio structuring is the art of a professional investment adviser to carefully allocate the funds of an investor in the appropriate channels. Diversifying risk is one of the prominent goals of portfolio structuring. Portfolios can be built upon the different asset classes like: debt, equity, government bonds, real estate, precious metals, commodities, futures and options or other alternative avenues such as real estate trusts or art.
The portfolio management process entails the matching of investment goals of the investor to the strategies for investment formulated by the portfolio manager. The overall market scenario, economic regulations and international events affect the share markets globally. The strategic asset allocation process brings clarity for the investor in terms of customized solutions for investment in different asset classes. Based on the risk appetite of each client, portfolio managers determine the percentage of funds to be allocated to assets with differing risk and reward levels.
Investing in shares is a particularly tricky subject. Retail investors invest in stocks with an expectation of gains from market price movements. They usually lack the knowledge and expertise of understanding the business models, future sustainability, and possible returns on initial amount invested. This is why portfolio managers are hired for professional advice on building portfolios and determining the structures. Here are some of the portfolio structures for share trading which are popular among investors:
Aggressive and active portfolio:
Growth stocks are usually associated with high risk and high reward. These stocks appeal to investors who aim for owning a stake in emerging companies on the growth path. Portfolio managers recommend aggressive stocks to investors with higher risk appetite. Nowadays fintech and technology startups are increasingly becoming a part of the aggressive portfolio of investors.
Shares of companies that are not high risk and relatively stable in returns form part of the defensive portfolio. These stocks are preferred by risk-averse investors, who do not wish to invest in shares that are very sensitive to the market environment and other economic dynamics. For example, an FMCG company’s shares would have a relatively stable demand and income generation.
Income bearing portfolio
Certain investors need regular payouts from their share investments in the form of bonus or dividends. They focus more on the cash flow generation ability and history of the companies whose shares are trading in the markets. Income bearing stocks provide for a regular income to the investor. He/she can also benefit from capital appreciation due to the general uptrend in price movements of these stocks over a period of time.
Speculation oriented portfolio
Shares that are purchased for speculation have a risk level which is higher than the aggressive stocks. These shares are from companies which have breakthrough products, or are on the verge of some kind of corporate restructuring like a merger or acquisition. Choosing the appropriate speculative stocks at the right time can lead to big-ticket gains for investors. These stocks are also preferred by risk-taking investors.
An investor who diversifies his investable surplus across avenues other than stocks is said to have a hybrid/mixed portfolio. Individuals can invest in debt securities, G-secs, real estate, commodities, derivatives and even alternative investments. The proportion of fund in each investment vehicle can be customized to suit the investor’s risk appetite. This is one of the most ideal forms of investing.
Portfolio structures for share trading are also influenced by the time period of investment. Greater the time available, shares can be selected accordingly by the investor. In case the investor only wishes to invest for a short period of time, speculative investments would be appropriate. Each investment strategy suggested by the portfolio manager and adopted by the investor has pros and cons. It is the responsibility of the investor to carefully study through the advantages and disadvantages of any investment strategy before adopting it. Having a hybrid form of portfolio is advisable as it spreads the risk taken by an investor across different securities. A professional approach to handling portfolios is required on the part of investors to ensure maximization of returns.