Question

Aravind, a 35-year-old salaried individual wishes to invest Rs. 15 lakhs in different investment avenues. He plans to invest in the education of his two children aged 5 and 8 years old, retirement, and contingency. Assuming the role of a Portfolio Management Consultant design a suitable portfolio for Aravind if –

a. He is willing to take the moderate risk for his investments.

b. He is a risk-neutral investor.

( The answer should be a min of 800 Words with a theory explanation )

Answer 1

Ta) If Mr.Aravind is willing to take a moderate risk, then his portfolio can be diversified with various investment instruments.

A moderate risk investor wants reduced risks and enhanced returns equally. This investor is willing to take moderate risks to gain higher long-term returns. A Moderate investor may incur a short-term loss of principal and a lower degree of liquidity in exchange for long-term appreciation.

There are several types of risk that are associated with any investment instrument,

Market Risk

Interest Rate Risk

Liquidity Risk

Tax Risk

These are the major risks associated, the level of risk differs from case to case and to build a portfolio, these risks need to be addressed.

A moderate risk portfolio can be built with a few investment instruments, these may include equity shares, mutual funds, debentures and also bank deposits. These instruments a will mitigate the major risks discussed above and have healthy growth at the same time.

Looking at his profile, we can assume that his investments are going to be long term so the money can be invested for almost 10 years till he pulls out some money for his children's education.

All the investments are quite liquid in nature so whenever Mr. Aravind is need of funds he can liquidate them easily.

15 Lakhs can be split into 35% equity, 25% mutual funds, 20%debentures( secured) and 20%bank fixed deposits.

i) Rs.5,25,000 in equity markets, bluechip stocks and mid-cap stocks with good growth potential for 10 years 25% growth expected.

ii) Rs. 375000 in multi-cap mutual funds and ELSS schemes that will help to get tax exemptions 30% growth expected.

iii) 300000 in company debentures that give a fixed return per year around 7-10%

iv) 3,00,000 in bank Fixed deposits @6-7% because bank Fd is assumed to be the least risky investment.

This is a portfolio plan which will be suitable for him because he has a moderate risk appetite and also has time to be invested in markets so the power to compounding works well.

b) Risk neutral is basically a term that is used to describe an investor category who are insensitive to any risk. These investors virtually ignore the risk completely while making an investment decision. If Mr. Aravind is risk-neutral, then it means he does not take in to consideration the risk factor attracted to investments and looks only at the potential gains. The stocks have the capability to given exponential returns and since Mr Aravind is risk-neutral the best investment avenue fr him will be equity. Since all the money is going to be invested in equities directly a proper diversification need to be done in the equity portfolio. Stocks from all, large cap mid cp, and small cap segment with potential growth will be chosen and sectoral diversification will also be done, like IT, Auto, Health, FMCG and banking.

The focus of the Indian Government on Digital India will benefit the IT companies. It will be very easy for midcap IT companies to grow rapidly compared to large cap companies. IT sector is considered as a very defensive sector, and because of this, it is under low risk from a longterm investment mindset. Currency fluctuation also has a major role to play in this sector. But in the long run, it will be stable.

The Indian Government has taken a few steps to promote the pharma sector in India. Pharma is gaining from the devaluation of INR. Most of the Indian pharma companies today invest heavily on R&D, and it delivers good results to them. Pharma company's future growth can be judged based on the number of Pending ANDA approvals from the US Food and Drug Administration.

FMCG is also a defensive sector, and it is always good to have FMCG stocks for Long Term investments. FMCG stocks are dependent on urban consumption, and consumption will never stop.

With the increase in technology the vehicles today have become very advanced in India, yet far from the US, so in the future Auto sector will grow along with the IT sector. The more new technologies come to India the better will be the growth, and this will ultimately improve the economy.

The banking sector is evergreen. Banking industry is an industry of the economy that is responsible to the hold financial assets for others and investing those financial assets to create more wealth. The sector also includes banking activities by government agencies, insurance, mortgages, investor services, and credit cards.

These sectors are good for Mr. Aravind to invest in as these are having good potential to grow and give good returns. Since risk is not a factor for Mr. Aravind these investments will be perfectly suitable for him. A risk neutral portfolio will give best returns when all investments are made in the equity markets directly.