You can include a wide range of assets in your portfolio, from stocks to derivatives. Assets in your portfolio will depend on your investment strategy. For instance, someone interested in price speculation might have derivatives in their portfolio. Different portfolio types exist based on the investment approach and asset allocation. Let us delve deeper and understand the different types of portfolio investments.
What is a Portfolio?
Before we get to the types, it is essential to understand what exactly is a portfolio is. New investors often fail to understand the meaning of a portfolio. A portfolio consists of different assets currently held by an individual or organisation. Portfolio assets could be stocks, derivatives, commodities, currencies, mutual fund units, ETF units, or commercial papers. The investor owns these assets in their portfolio to achieve the financial goals. Building a diverse portfolio is a must whether you are investing in the stock market or commodities.
When you build a diverse portfolio with different assets, risks are reduced. Diversification, asset allocation, and other portfolio attributes depend on its type. For instance, someone with an aggressive investment approach might allocate assets with more risks. Beginners often jump into the trading sector without understanding the types of portfolio assessment. As a result, they fail to structure their portfolio based on investment objectives. Beginners must start their investment journey by understanding the types of portfolios first.
Types of Portfolio Investment
Here are the types of portfolios you must know:
As the name suggests, an aggressive portfolio is for investors who prefer to take risks. An aggressive portfolio aims for high returns, thus explaining the inclusion of high-risk securities. Several high-risk securities or assets can be included in an aggressive portfolio. For instance, stock traders with an aggressive approach might look for high-beta stocks. These stocks are highly volatile and show frequent price fluctuations. However, high-beta stocks also open doors for high returns. If you want to build an aggressive portfolio, prefer companies in the growing or emerging sectors.
Defensive or Conservative Portfolio
As the name suggests, a defensive portfolio is for investors who prefer to safeguard their returns. The risks are minimal with this portfolio type. The returns might not be significant in some cases, but they are sure to come. For instance, an investor with a defensive approach might invest in blue-chip stocks. These stocks are of financially stable companies that are often market leaders and are likely to maintain their financial position. Conservative portfolios also consist of debt securities, as they provide a fixed stream of income. Some other assets preferred by conservative investors are cash equivalents, government bonds, REITs, preferred stocks, money market funds, and annuities.
Among the different types of portfolios, a balanced portfolio is preferred by many investors. As the name suggests, a balanced portfolio manages the risks and returns. Usually, investors balance the equity shares and debt securities in their balanced portfolio. A balanced portfolio might contain 50-60% equity shares and 40-50% debt securities. Other securities like IPO shares, mutual fund units, REITs, and ETFs are also found in balanced portfolios. A balanced portfolio will have both short-term and long-term securities.
Many investors do not focus on long-term returns or capital appreciation. Instead, they want to build a stable source of income through their portfolios. In such a case, investors can prefer income portfolios. Income portfolios consist of dividend-paying stocks, debt securities, and other assets offering a fixed income at regular intervals. The risks are also minimal for an income portfolio compared to other portfolios.
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A value portfolio consists of cheap assets that have higher chances of growth. Value-based investors search for undervalued assets with chances of capital appreciation. For instance, you might find several undervalued stocks in the market. They belong to companies that have performed well in the past but are currently facing difficulties. Value portfolios can also contain cyclical stocks, preferred shares, bonds, cash equivalents, and distressed assets.
Investors often indulge in the speculation of the prices of assets. Investors interested in price speculation usually invest in financial derivatives, which are futures and options contracts. Speculative investors can also predict the growth or downfall of a sector and make portfolio decisions accordingly. There are some risks associated with speculative portfolios. For the same rationale, investors interested in speculative portfolios indulge in extensive research. You cannot make the right portfolio decisions without extensive research and analysis.
Hybrid portfolios are meant for flexible investors. They build a diverse portfolio with varying assets. A hybrid portfolio offers the best of both the value and growth portfolios. For instance, you can include both value and blue-chip stocks in your portfolio to get high returns. You can also add dividend-paying stocks to develop a regular source of income.
Investors must first decide on their investment strategies and goals. Based on their goals and strategies, they can choose the portfolio type. You can choose from balanced, value, aggressive, hybrid, speculative, and other types of portfolios. Beginners must first learn the significance of different portfolios before making investment decisions. Choose your preferred portfolio type and start investing now!
Disclaimer: This blog is written exclusively for educational purpose. Any stock mentions in the blog are examples and not recommendations. Please refer to our research reports or analyst recommendations for stock ideas.