Portfolio

A portfolio is everything an investor owns, looked at as one thing. A single stock is a holding. A hundred stocks, a few mutual funds, two fixed deposits and some gold are a portfolio. The word matters because the pieces interact. A loss on one holding can be offset by a gain on another. The overall result depends as much on how the pieces are combined as on how each one does.

Asset allocation

Asset allocation is the split between the broad asset classes: equity, debt, gold, real estate and cash. It is the first and biggest decision. An investor with 80% in equity will have a very different year from one with 30%, whatever stocks each picks. A common rule of thumb is to hold a lot of equity when the money is not needed for a decade. Then move towards debt and fixed deposits as the goal gets closer. There is no single right split. It depends on time horizon, income stability and how the investor behaved in the last bear market.

Diversification

Diversification means not depending on one outcome. Within equity it means holding stocks across sectors and sizes rather than five banks. Across the portfolio it means holding assets that move differently. Gold often rises when shares fall. Debt pays a steady return while equity swings. The point is not to avoid losses. It is to make sure no single event can wipe out years of saving. Diversification stops working when it becomes clutter. Thirty mutual funds that all hold the same large caps is not diversification. It is the same bet thirty times.

A simple example

Take an investor in their thirties with a steady salary. They might hold 60% in equity, split between an index fund and a few direct stocks. Another 25% sits in debt through an FD and a debt fund, 10% in gold and 5% in cash for emergencies. If a bull run takes equity to 70% of the total, they sell some equity and top up debt to get back to 60%. That is rebalancing. It makes the investor sell high and buy low without predicting anything. Once or twice a year is enough. A starting point for someone with a modest salary is laid out in how to invest at 25 with a Rs 30,000 salary, and the case for index funds as the core holding is in what is an index fund.

Measuring a portfolio

Return is the obvious measure. But it should be compared with a benchmark that matches the mix. A 60% equity portfolio should not be judged against the Nifty 50 alone. Risk is measured by how far the portfolio falls in a bad year, called the maximum drawdown, and by how much it swings month to month. A portfolio that earns 12% with a worst year of minus 10% beats one that earns 13% with a worst year of minus 40%, for most people. Most people cannot sit through the second one.

A portfolio for a trader

For an active trader the long-term portfolio has a second job. Shares and ETFs in the demat account can be pledged with the broker as collateral for F&O margins. So the investment portfolio funds the trading book without being sold. How that works on SAHI, including haircuts and the cash rule, is explained in pledging in trading. The discipline that matters is keeping the two apart in the mind. Trading losses should never be covered by selling the long-term holdings.

FAQs

How many stocks should a portfolio have?

Enough to spread risk without losing track. Most studies put the useful range at 15 to 25 stocks for direct equity. Beyond that, an index fund does the job more cheaply.

What is a model portfolio?

A template allocation published by a brokerage or adviser, usually with named stocks and weights, that investors can copy or adapt.

How often should a portfolio be rebalanced?

Once or twice a year, or whenever an asset class drifts more than about five percentage points from its target.

Is a mutual fund a portfolio?

Each fund is a portfolio of securities managed by someone else. An investor's own portfolio is the collection of funds, stocks and other assets they hold.