Portfolio management can seem like a daunting task for many. Before we jump to the topic of the day, let us quickly touch upon some basics to set the context.

What is a portfolio?

In simple language – a portfolio is a compilation of investments in which investors such as you have invested. Let’s say you own a house, 100 gms of gold, a bar of silver and shares of a large company in India.

These investments put together is your portfolio.

Benefits of having a portfolio

There are two major benefits of having a portfolio:

Keeping a record of your purchases

Well, it merely gives you an understanding of where you stand regarding your wealth.

However, if you have kept a record such as purchase price, purchase date etc. of your investments in multiple asset classes (such as real estate, currency, stocks, bonds, etc.), you can get meaningful information such as how your portfolio has performed over time, which asset class has contributed to wealth creation and the likes.

Helps you assess

It also helps you assess if you have invested in the right asset class or not and enables you to gauge your risk profile.

Having described the background of a portfolio, let us now head towards the main topic of the blog.

Managing portfolio helps you ensure that it remains healthy and reflects your conviction at all times.

Also, portfolio monitoring tells you about the investments that are profit-making and the investments that are not successful and need to be re-looked at. In this blog, we seek to discuss some of the important things that you should know as an investor about portfolio management.

10 things every retail investor must know about portfolio management

Here are the 10 things that you must know about portfolio management

1. Diversification is key

In portfolio management, always look for healthy diversification.

The concentration of one asset class is risky, and diversification spreads this risk across asset class/securities in the portfolio.

Remember, if one stock/fund is not doing well, the other can always negate its poor performance and balance the overall performance of the portfolio.

2.Get a grip on your expenses 

While planning your personal finance, you should always look to cut down on your unnecessary costs so that you can use that money for investment purpose.

For example, portfolio management doesn’t need a highly sophisticated tool if your assets are not excessively high.

Thus, subscribing to such means would not help. Similarly, you can always choose brokers who charge a flat fee over the ones who charge a percentage based commission on transactions.

This approach enables you to save money particularly when your stock/fund is not performing well.

3. Beware of the risk angle

Learning from gurus is a good thing, but one should not copy them blindly.

For example, just because investor Rakesh Jhunjhunwala bought Jaiprakash Associates doesn’t mean you would invest your money in the same stock.

Remember, his portfolio size and your portfolio size may not be comparable.

Similarly, his risk and your risk taking ability would be different. Thus, it is wise to first identify your risk appetite by knowing how much amount of money you can comfortably lose.

Accordingly, it would help if you take a decision. Investing in equity is a risky business, thus invest only if you are sure that your losses will not add any further liability on you.

4. Age is important! (Only in investing)

People often tend to neglect the age while investing. Remember, portfolio management is dependent on age.

Imagine you are 60 years old and have retired from work. You get a pension of Rs 50,000 per month and have an expense of Rs 40,000 per month.

Why should you NOT over-diversify your portfolio?

Will you have the flexibility of investing in the equity market or equity dominated funds? No, right!

This is because you can’t predict the movement of equity and your investments may go down which could impact your finance.

Thus, with increasing age, the frequency of portfolio re-balancing should increase. What is re-balancing? It is an art of ensuring the portfolio reflects the right share of asset class at all time.

When you are young, you can always take a risk and have a higher allocation to equity and lesser to debt but with time the distribution to debt and safer products increases. Thus, still consider age factor before investing.

6. Discipline is key to wealth accumulation

You must have seen multiple TV commercial regarding Systematic Investment Plan.

While planning your finances, it is essential that you assess the frequency of your investments. For example, investing once in 2008 and again in 2013 would not help.

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Even a small amount (as low as Rs 500) monthly would be helpful. Key to healthy portfolio management is a small yet regular investment so that you keep on accumulating wealth for your future.

God forbid if you lose your job, it is this fund that would help you achieve financial freedom until you find a new source of income.

7.Monitor what you invest

Do you monitor your kid at home with regards to his/her academic performance?

Yeah well,  your portfolio is your baby. Literally. You need to monitor it regularly.

What is a concentrated portfolio?

Assessing your portfolio position at regular intervals will help you identify the assets that are not performing well. This approach would enable you to take corrective action in the portfolio.

Monitoring your portfolio helps you cut down on losses and makes you wiser with decisions.

8.Debt vs. Equity

At every stage of your investing journey, you will face the dilemma between debt and equity.

Remember, debt provides constant, continuous, assured return whereas equity offers a high performance that is neither continuous nor assured.

So, debt brings in low risk and low returns, whereas equity funds have a varying degree of risk, but they give higher returns

So, choose wisely so that your overall portfolio risk-reward is balanced as per your appetite. Do the math on how much you can get if your equity will be zero and accordingly choose the allocation.

9.Gain basic knowledge of the market

Portfolio management doesn’t require a Ph.D.

It is always viable to have some basic understanding of the capital market. No knowledge is dangerous. But a little knowledge may not help you add value, but can still help you prevent from making losses.

Thus it can have a definite bearing on your personal finance.

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10.Financial advisors and assessing tax liability

Portfolio management is a necessity, now with innovative instruments available in the market to invest and people holding on to more than one instrument.

Portfolio management undoubtedly needs some understanding of the market.

Thus, it is never too late to consult a financial advisor. While you may have some knowledge and first-hand information, if the stake is high, it is always good to seek a second opinion.

Tax management is an integral component of portfolio management.

Thus, always consider the tax liabilities before investing. Also, don’t over-invest in instruments that offer tax benefits as it may not help. For example, Equity Linked Savings Scheme (ELSS) provides tax benefits under section 80 C only up to Rs 1.5 lakhs per annum.

These investments are locked for three years. Thus, if you invest Rs 2 lakhs, it would not help you, and your money would remain blocked unnecessarily.

So consider tax benefits, liabilities regarding redemption (short-term gain and long-term gain), etc. before investing.

Happy Investing!

The views expressed in this post are that of the author and not those of Groww