15.8 Constructing good portfolio

Hanumant Dhokle

Portfolio construction

Many investors do not have the basic understanding of a good portfolio. In fact, there is no proper planning when it comes to setting up a portfolio. Many times you buy or sell a scrip without looking at the portfolio. The end result of such a reckless approach is that even while few companies give you extraordinary returns, with your portfolio you are going nowhere. If you are considering constructing a portfolio the following check-list would help you in making the right decision

Primary And Secondary

Ideally, any portfolio should be divided into two main parts - primary portfolio and secondary portfolio. The former should have a long-term horizon while the latter should contain short to medium-term scrips to play in the market, maybe during momentum. Never try to sell the primary portfolio in a hurry. A major part of your investments should fall into the primary portfolio.

Skewed Sector Bias

You should not be overexposed to any one sector in terms of weightage. The maximum weightage for a particular sector should not exceed 20 per cent. This strategy gives volatility absorbing capacity to the portfolio.

Keep Future Leaders

Unfortunately no one looks at the future leaders as everyone wants to ride the present leaders. You can improve returns by taking advantage of a scrip that is available at lower prices.

Stocks In Momentum

Many of the momentum stocks may see their market cap rising many times during progression. But the best way to tackle the issue is simple: When momentum stocks go up by at least 50 per cent from your purchase price, take out 100 per cent of the original investment. To simplify it through an example, suppose you had bought 1,000 shares of ABC Ltd at Rs 27. After buying, the scrip goes to Rs 41. This is the time you need to sell that many shares that recovers your cost of Rs 27,000. In other words, sell 650 stocks at Rs 41 to cover your cost. The balance quantity would allow you to ride an upside. In case, the market goes down you are not much bothered as you have already recovered your cost. In fact, momentum stocks should never be part of your primary portfolio.

Dividend considerations

In a volatile market it is better to have companies that have been paying dividend. Remember, dividend paying means actual cash outflow to the shareholders. The company which has been paying dividend consistently to investors would always command a higher P/E vis-à-vis one that is not paying dividend in the same industry. Such companies also bring stability to the portfolio.

Take Profit In Time

What matters at the end of the day is the money you could make from the portfolio. It has often been seen that people are not smart enough to book profits. One should do that even for the core portfolio. Remember that you need to keep a good balance of weightage in the portfolio of the sector and companies. If single scrip sharply shoots up it calls for weightage alignment. Here, you can book profit to such an extent that the weightage comes in order. For example, you bought a scrip with 10 per cent weightage and owing to some favourable conditions, the scrip shoots up to account for 20 per cent weightage now. In this situation, you need to book profit to such an extent that the weightage again comes down to 10 per cent.

No Churning

Many investors have the habit of buying and selling stocks without any proper reasoning. Churning a portfolio is nothing but expenses attached to your portfolio and may sometimes result in selling good scrips at lower levels. Hence, do not churn your portfolio just for the sake of it. Look at the change in company fundamentals. If there is no change, then do not churn your portfolio. Stick to the scrips and wait till it is prudent to sell them after due consideration.

Right Breadth Of Portfolio

Often investors have many companies in their portfolio. This makes them not only too difficult to monitor but also results in below average returns. At the same time, investors sometimes also have very few companies in their portfolio, thus making it risky. Generally, the maximum weightage for one scrip should not exceed 15 per cent.

Rate this article:
2.0
Comments are only visible to subscribers.

Equity Research

DALAL STREET INVESTMENT JOURNAL - DEMOCRATIZING WEALTH CREATION