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Does a conservative portfolio protect ones investments in a volatile market? Research Team | Posted On Wednesday, April 09,2014, 10:14 AM

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Does a  conservative  portfolio protect ones investments in a volatile market?



One has heard of the famous saying “Better be safe than sorry” .Doubling returns in short periods of time is what attracts one to the stock markets. In all this euphoria one forgets that stock markets carry risk and a massive loss in markets not only wipes out ones investment but can also be the cause of falling in debt .In all this uncertainty one wonders if it were possible to only get good returns with no risk taken ? Is this holy grail of investment possible? No, but one can surely get decent returns with very less risk and this is where a conservative portfolio comes into play .Remember it does matter how slowly you travel as long as you do not stop.

What is a conservative portfolio?

  • A conservative portfolio is designed for the long haul. Its time horizon is at least 5-10 years. One invests in large reputed blue chip Companies even though shares of these Companies may be costly. One accumulates these shares slowly and gains peace of mind in such an investment which gives good returns with the passage of time.
  • One can also invest in defensive stocks which give good dividends. This helps one especially in his retirement years as these dividends prove to be an excellent source of funds in one’s old age.
  • Alternate investment funds such as gold and gold exchange traded funds move in a direction opposite to equity. When equity stocks fall these alternate investment funds hold up one’s portfolio.

How does one build a conservative portfolio?

Contingency funds:
In this day of high expenses one needs to set aside funds for use in an emergency so that he does not have to sell his hard earned blue chip stocks in an emergency. One must create a contingency fund for emergency expenses in order to protect his portfolio.

Keep investing :
Never stop investing in a conservative portfolio .Keep funds aside for unique opportunities. A sudden fall in the price of blue chip stocks due to the dollar appreciating against the rupee observed last August presents a unique buying opportunity .Always be ready to spot good buying opportunities as well as have funds ready to pick them up. Remember opportunity rarely knocks twice.

Maintain size of the portfolio :
One needs to have and maintain a portfolio of decent size. One’s portfolio should have at least 15 stocks of well reputed Companies in these times of volatility .Having too many Companies in one’s portfolio makes managing the portfolio difficult.

Diversification :
One must never put all his eggs in one basket .Diversification basically means investing in reputed blue chip Companies across sectors.If certain sectors underperform ones returns are balanced as other sectors might over perform and balance this loss.

Invest in quality not quantity :
One must always pick up good quality stocks and accumulate them such that he has large holdings of such Companies with time and a strong portfolio. Never invest in a stock just because it is cheap. One should always do his research as penny stocks even though cheap crumble in a bear market and in some cases are never heard of again. One’s losses are massive.

Cyclical vs Defensive stocks

One should have a certain amount of investment in cyclical or interest rate sensitives. These stocks rise meteorically in bull markets and even small allocations towards stocks of banks, automobiles and infrastructure lead to a massive gain. Defensive stocks such as pharmaceuticals and FMCG give good returns over a long period of time and hold their own in a bear market. A conservative portfolio has a large allocation towards defensive stocks.

Why do index funds play an essential part in one’s portfolio?

  • An index fund mirrors the stock market index it tracks. It gives returns in line with the stock market index it traces. This could be the S& P BSE Sensex or the S& P CNX Nifty .
  • The index fund invests in the 30 stocks that comprise of the S& P BSE Sensex or the 50 stocks that comprise of the S& P CNX Nifty. The proportion of investment in each stock will be the same as the weight of the stock in the index.
  • These are passively managed funds and no active management is required by the portfolio manager. This translates to lesser management fees associated with the fund. An investment in the index fund has lesser fees associated with it.
  • An index fund cannot beat the stock market index it traces but gives returns in line with this index. Since many a time the stock market index gives good returns the index also gives a good return.

Should gold be a part of one’s portfolio?

  • Gold is regarded as an alternate investment to equity. When the price of gold increases equity tends to move downwards and vice versa. Both gold and equity are negatively correlated.
  • One must allocate at least 10% of his portfolio to gold by holding it in physical form or at least as a gold exchange traded fund.
  • Physical gold is regarded as a hedge against inflation. Gold is similar to a term protection policy for one’s financial portfolio.
  • In recent years gold prices have shot up and even though they can generate massive returns with time physical gold investments should be retained as a safe haven in difficult and uncertain times.

Investing in a public provident fund

  • No matter how much of a risk taker one is he has to allocate a certain percentage of his investments towards a highly safe instrument albeit with lower returns to more aggressive instruments such as a public provident fund.
  • Even though a public provident fund has a lock in period of 15 years investments in it are tax deductible up to INR 1 Lakh per annum under Section 80 C of the income tax act.
  • The tax bracket for a public provident fund is EEE (Exempt ,Exempt, Exempt ) rated and along with the INR 1 Lakh deduction the interest earned as well as the withdrawn amounts are tax exempt.

Is insurance a must have in one’s portfolio

  • No portfolio can be complete without insurance.
  • Among the many insurance policies available a term insurance plan is a must have.
  • This is essentially a pure protection or a mortality cover with no survival benefit.
  • Since these policies do not have a savings or an investment component they come cheaper when compared to other types of insurance policies.
  • One can obtain certain additional benefits such as a cover for a critical illness by paying a slightly higher premium called rider benefits. In case one suffers from a critical illness a lump sum is paid.

There is a famous saying "It's not how much money you make, but how much money you keep, how hard it works for you, and how many generations you keep it for." A conservative portfolio might just be the answer to the problem.

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