SEBI Guidelines for Portfolio Management: The Ultimate Guide

 

A sound investment idea is to invest in a diverse range of assets. This way, you’ll share the risk of any one type of investment going down. For example, if you have 10% of your money in cash and 90% in stocks, then you’ll only lose 10% if there's a crash in the stock market However, this strategy can be tricky for some investors. That’s because many people aren’t comfortable with taking risks and want to be sure that they won’t lose money on their investments.

 

What is a portfolio and why should you care?

A portfolio is a collection of different investments that your portfolio manager will manage for you. A portfolio manager decides which assets to invest in and then makes a plan to buy or sell these assets in order to meet your financial goals. The following is a list of assets that a portfolio manager might choose to buy and sell: Stocks Bonds Real estate Precious metals Videogame-related securities General equities Money market funds Other The list above only represents a fraction of the assets you can invest in. If you have a lot of money to invest, it’s possible that a portfolio manager might even buy an entirely different type of asset than what you selected.

 

What are the different types of portfolios?

You may have heard this question before: "What is the difference between a stock market portfolio and a dividend portfolio?" I guess you can figure this out by reading this article, but I thought I'd make it a bit easier for you.

 

Why diversify?

Investing in a diversified portfolio has a few advantages. It helps you spread your risks and reduces the impact of any one position by limiting your exposure to it. When a particular investment falls, the other positions in your portfolio are cushioned from losses. That’s why this type of investment has a reputation for stability. Diversified portfolios may sound boring, but they do contain high-quality investments. For example, if you have 10% of your money in cash, you’ll have more funds available to invest in stocks. That’s because the more money you have in cash, the less the portfolio gains if any one stock outperforms the other stocks in it.

 

The risks of investing in a non-diversified portfolio

Let's say you’re an investor who's worried about this risk, but still wants to invest in the stock market. You could split your money between these three options, known as the 'Risk Appetite Approach'. You might invest 10% in cash, 60% in stocks, and 10% in commodities. These are all liquid, easily exchangeable assets, so you won't have to sell them at a loss. However, this will certainly mean a few sleepless nights every time your portfolio falls in value. If the stock market falls, you could end up losing your entire investment. On the other hand, if the stock market rises, then your investments will jump up to an amount that you're comfortable with.

 

How to build a diversified portfolio

SEBI has come up with guidelines that are useful for anyone interested in building a diversified portfolio. Let's explore them. Don’t put all your eggs in one basket The most common mistake investors make is placing all their eggs in one basket. These investors want to invest all their money in the same stock or the same investment scheme. However, this isn’t a good idea. While diversification isn’t just about placing all your eggs in one basket, it’s also about not over-diversifying. For example, if you invest in stock such as HDFC Bank, you don’t want to place all your eggs in one basket. On the other hand, if you invest in stock such as Reliance Industries, you don’t want to place all your eggs in one basket.

 

Rule of thumb for building your diversified portfolio

You could choose an asset allocation of 80% to 20% stocks and 80% to 20% bonds. Select your asset allocation based on your risk profile. Here is a quick guide to consider before picking your investments. Long term risk profile If you’re very conservative and want to invest in safe investments like bonds, then 80% to 20% bond is a good solution. However, in the long run, high-interest rates can work against you and not give you the best returns. Medium-term risk profile For someone with a medium to long-term horizon, the best asset allocation would be in high-risk assets.

 

Diversifying with stocks, bonds, and cash

Source: Shutterstock The safest way to invest is to spread your money over various asset classes. Doing so can reduce the risk of one investment sector suffering an unexpected dip. For example, in the worst-case scenario, if you invested all your money in a stock market-focused fund, you could have seen 100% of it wiped out. You may also invest in gold, which has traditionally served as a hedge against market volatility. That’s because its prices don’t always move in sync with stocks. Furthermore, you can spread your money across different asset classes via traditional savings accounts, as well as exchange-traded funds (ETFs). While the latter is ideal for higher levels of risk, it does come at the expense of transaction costs.

 

Diversifying with commodities, foreign currencies, and gold

We want to put your money in assets that are considered safe and that we can trust, like gold, foreign currencies, and commodities. For example, if you have 10% in gold and 90% in stocks, you’ll only lose 90% if stocks plummet (but you’ll keep your gold). Gold is also considered a long-term investment, which means that it can only be sold for its current value, so it’s a good way to store value for your long-term needs. Gold and foreign currencies are also both considered safe by financial authorities. Using Exchange Traded Funds and mutual funds An exchange-traded fund is a tradable ETF. There are multiple ETFs for investments in different countries and stock markets around the world.

 

Diversifying with real estate holdings

As the name suggests, real estate is one of the best options for diversifying your investments. The benefits of real estate include the fact that you won’t lose your capital if a specific stock market plunges, and that real estate can provide a stable source of income that might offset any losses in the stock market. However, it’s important to note that investing in real estate doesn’t necessarily mean buying a large property. Instead, you can buy apartments or homes that you can renovate to sell at a higher price in the future. This way, you can reap the benefits of a rising market without the risk of being hurt by a crash. Investing in forex While real estate can be bought and sold, the currency is a lot more complicated.

 

Conclusion

If you want to avoid suffering a loss of capital on your investments, then make sure you invest a portion of your money in debt and fixed-income investments. It’s always important to manage your money with the interest of the investor in mind.

full-width