What Approach Should You Take To Create An Equity Portfolio?

Any investment approach is always person-specific. One needs to develop one’s own approach to investing. Generally, we suggest that the equity portfolio should be well-diversified, but quite a few successful investors have concentrated portfolios.

However, someone having a concentrated portfolio needs to have a deep understanding of the stocks they are holding and also regularly track them since one wrong call can have a substantial effect on the performance.

For moderate-risk investors, we suggest a mix of 60 per cent in bluechips or large-caps, 30 per cent in mid-caps and 10 per cent in small-caps. The bluechips give stability to the portfolio, and the mid- and small-caps could provide the alpha.

Typically, a well-diversified portfolio should not have more than 25-30 stocks, with each of the stocks having a weightage of 3-5 per cent based on one’s comfort or confidence in the stock. So, a portfolio can have about 15 large-caps, eight mid-caps and two small-cap stocks. The bluechips or large-caps need not be under regular watch since most of the market is keeping a close track, but the investor needs to keep a tab on the mid- and small-caps—reassess why they should continue to hold them, and keep track of the news flow as well as the earnings updates. Nowadays, we have various platforms that provide such updates along with research reports of various brokerage houses.

One should also try various methods to arrive at a specific approach which is suitable. The losses incurred in the process are the costs you pay for getting the approach right. The only thing common across various approaches is the effort to do some research. Also, one should maintain discipline. Most of those who fail are the ones who keep jumping from one approach to another and end up with an unwieldy portfolio.

It’s also important to maintain liquidity which could be utilised when you spot an opportunity. The liquidity could be within the equity portfolio or outside.

For instance, when I am fully invested, I do shift a part of my debt allocation to equities if the opportunity is compelling, but I ensure that I revert to my original allocation as soon as possible. One needs to keep exploring based on the ever-changing environment, but any change in strategy should be well-thought-through.

The author is a well-known market analyst