Portfolio investing means investing in the group of financial products like mutual funds or stocks instead of a single product.
Talk to anyone who is good at investing, the only answer you will get is portfolio investing is the best way to go about things.
If you are new to investing have look at Start Investing.
Why is Portfolio Investing the best?
Portfolio investing led to diversification and with diversification you reduce risk. So, it’s possible for you to generate higher returns at same risk. It’s that simple.
Don’t believe it, Let me show with an example. I am creating a portfolio that mimics Gold’s risk and returns using Debt fund and Equity Fund.
Below chart shows how portfolio help you reduce risk without changing returns or increase returns without changing risk.
If you buy only gold on average it give ~11% returns with 14% risk whereas if you build portfolio
- FD: 70%
- Sensex: 40%
- Gold: 35%
Risk decrease by 50% without change in returns
- FD: 25%
- Equity: 35%
- Gold: 40%
Returns increased by 20% without change in risk
This makes sense across very different types of products but does it makes sense to the similar product as well?
Why is Portfolio Investing the best for mutual funds also?
There are multiple reasons to do it but most important reason is to diversify across funds (fund managers) and different asset classes (fund categories).
A lot of people ask about best mutual funds but there is nothing called best mutual funds. Actually, there is so much variation in the mutual funds its best create portfolio of 2-4 mutual funds.
Check out another blog of it here for more details.
How to create a Portfolio of mutual funds?
First of deciding the broad purpose of our investment and how much risk you are willing to take. Based on that, choose the mutual funds and give weights to them and you are done. It’s that simple.
Always invest by creating a portfolio instead of a single mutual fund.