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Posted at: Aug 22, 2016, 12:53 AM; last updated: Aug 22, 2016, 12:54 AM (IST)

Building ideal portfolio for wealth creation

Systematic investment is the key

  • Important factors include your age, how much time you have to grow your investments, the amount of capital you want to invest and future capital needs
  • Systematic investment can be one of the most effective ways to build wealth
  • Remember, making money can be a short-term process,
  • but creating wealth happens in the long run
  • Building a well-maintained portfolio is important toany investor’s success to create wealth
Building ideal portfolio for wealth creation

B Gopkumar

Investing in the stock market can be an unbelievable way to generate wealth over a period of time. Though there are many individuals who refrain from investing in the stock market because they believe it’s too dangerous, systematic investment can be one of the most effective ways to build wealth. Of course, one should be smart and study the most favourable ways of investing. Remember, making money can be a short-term process, but creating wealth only happens in the long run. Creation of wealth is a product of patience and knowledge. Building up a well-maintained portfolio is important to any investor's success to create wealth.

As an individual investor, one needs to know how to determine asset allocation that best conforms to your personal investment goals and strategies. In other words, your model portfolio should meet your future needs for capital and give you peace of mind. This is regardless of whether you own a dozen companies or a hundred in your equity portfolio.

Of course, there are several elements that go into making an ideal or model portfolio, which takes care of your returns over a period of time. Important factors that need to be considered include your age, how much time you have to grow your investments, the amount of capital you want to invest and future capital needs. Generally, high risk takers will have a more aggressive portfolio and, devote a larger portion to equities and less to bonds and other fixed-income securities.

Thumb rule for equity allocation

Most successfully followed the rule for equity allocation is 100 minus your age. For instance, my age is 35, and then typically, 60-65% of my investible funds are in equities at any given time. Building a robust portfolio, which preserves a balanced temperament during turbulent market is not out of reach for the individual investor. Start your research by zeroing on the industry/sector in which you want to invest (FMCG, technology, electronics, chemicals etc). Within this sector, select companies on the basis of their size (i.e. market capitalisation) and/past Return on Equity (ROE) record. You can use one of the many tools to find companies based on industry/sector, market capitalisation and on the parameters of profitability and growth ratios etc. You can make a list of stocks for further research based on these parameters. Thanks to Google, today the internet is filled with millions of pages of material on the various investment opportunities. Also, there are many tools to help you research and scan a list of companies based on a range of parameters such as — industry/sector, size/market capitalisation, location and shareholding etc.  So, looking beyond Infosys and TCS of the world is not half as difficult as it was a couple of decades ago.

How to maximise portfolio returns

As a thumb rule, the generally followed principle is to invest around 50% of the portfolio in blue-chip or well established companies, then another 25% in upcoming mid-caps and the balance in small lesser known companies. One should aim to minimise risk in each individual stock and always invest in companies with a lower cash-flow payback period. Financial position or balance sheet of each company should be such that it has a capacity to survive high levels of financial and operating adversity caused by unanticipated changes.  The real challenge of building up a portfolio is to maximise earnings over the holding period. Your goal as an investor should simply be to purchase, at a rational price in an easily understandable business whose earnings are virtually certain to be materially higher five, 10, and 20 years from now.

Over time, you will find only a few companies that meet these standards — so when you see one that qualifies, you should buy a meaningful amount of stock. If you are looking for long term investment stocks, once you select a set of companies based on whatever your consideration may be (i.e. market capitalisation, CAGR in profit, risk of investment vis-à-vis return, etc.) — five to 10 is the maximum number of stocks you should be actively holding at any given time. Sure, you can diversify and add more stocks in your portfolio, but if you can’t get it right, you will get a similar result with holding 15, or even more.

The writer is CEO — Broking & Distribution Business, Reliance Capital. The views expressed in this article are his own


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